Industrial Output Stalls in India; Interest-Rate Cut Likely

June 12, 2012
The data adds to an increasingly gloomy picture of the once-booming Indian economy, which analysts say has been hit by a lack of economic reforms, high interest rates, plummeting business confidence and the eurozone debt crisis.

India's industrial output grew just 0.1% in April year-on-year, official data showed Tuesday, adding to concerns about the economy and raising the chances of an interest-rate cut next week.

The manufacturing sector, which accounts for three-quarters of the industrial production index, also expanded at a weaker-than-expected 0.1%.

And production of capital goods, a key indicator of investment, shrank 16.3%.

The data adds to an increasingly gloomy picture of the once-booming Indian economy, which analysts say has been hit by a lack of economic reforms, high interest rates, plummeting business confidence and the eurozone debt crisis.

Analysts polled by Dow Jones Newswires had expected industrial production to increase 1% in April, based on a median of their predictions, after a shock contraction of 3.5% in March.

The new data comes on the heels of figures published on May 31 showing the Indian economy expanded 5.3% in the January-March period, the slowest quarterly growth figure in nine years that led to a round of soul-searching.

After a decade of scorching near-double-digit economic growth, there is growing alarm that India is sliding back toward its previous expansion rate of 5% to 6%.

The government says India needs higher growth to lift its overwhelmingly poor 1.2-billion population out of poverty and provide the estimated 8 million to 10 million new jobs every year to absorb the expected growth in the labor force.

In contrast to the woes in India's industrial sector, output from China's factories grew 9.3% in April on a 12-month basis and 9.6% in May, the government said over the weekend.

Next Monday, India's central bank holds a policy meeting where it is expected to cut interest rates again, having raised them 13 times between March 2010 and October 2011.

"The weak industrial-production number we have and the generally subdued growth and lower oil prices will add more pressure on the central bank to cut rates next week," HSBC Asia analyst Leif Eskesen told local television.

He cautioned, however, that, "I don't think easing policy rates is the right instrument to improve the growth rate in India."

Lower interest rates are likely to result in higher inflation -- already at 7% on an annual basis -- because of India's poor infrastructure and other structural constraints, many analysts believe.

But the government also is unable to stimulate the economy because of a gaping fiscal deficit and increasing pressure to rein in spending and subsidies.

The left-leaning administration of Prime Minister Manmohan Singh has been unable or unwilling to push through economic reforms such as opening up the retail sector to foreign investment because of disagreements in the coalition.

Rating agency Standard & Poor's warned Monday that India could be the first of the BRIC emerging economies to lose its investment-grade debt rating unless it revives its growth and rekindles its reform agenda.

In April, the firm downgraded India's credit outlook to negative from stable, maintaining its rating at "BBB-" but warning it faces at least a one-in-three chance of losing its status if its public finances worsen.

Copyright Agence France-Presse, 2012

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