India’s Industrial Output Growth Slows to 20-Month Low

India’s industrial output grew at the weakest pace in 20 months, adding to concern the economy may slow after the steepest interest-rate increases in Asia.

Output at factories, utilities and mines rose 1.6 percent in December from a year earlier after a revised 3.62 percent gain in November, the government said in a statement in New Delhi today. The median estimate of 27 economists in a Bloomberg News survey was for a 2 percent increase.

Reserve Bank of India Governor Duvvuri Subbarao has signaled borrowing costs will rise further to damp inflation after boosting rates seven times in a year. Concern price gains and costlier credit will damage purchasing power has spurred a 15 percent slump in the Bombay Stock Exchange’s Sensitive Index this year, the region’s worst fall.

“Higher inflation and borrowing costs will have a damping effect on the demand going forward” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore. “But the main reason output slowed is because of very strong base effect.”

December’s production number in India may have been affected by the comparison with a year earlier period when output jumped as the economy rebounded from the global financial crisis. Industrial output climbed 18 percent in December 2009, according to government data.
Stocks Gain

The Sensitive Index erased the day’s losses by close of trading and gained 1.5 percent. The yield on the 7.8 percent bond due in September 2020 rose two basis point to 8.15 percent. The rupee was little changed.

Production growth in December was dragged down by manufacturing, which rose 1 percent from a year earlier, compared with a 3.2 percent gain in the previous month, today’s report showed. Mining production rose 3.8 percent and electricity output gained 6 percent. Capital goods production fell 13.7 percent.

“The output growth slowed mainly because of the base effect and doesn’t mean we are going into weak growth,” India’s Industry and Commerce Minister Anand Sharma told reporters in New Delhi today. “We’ll end with higher growth this year than last year.”

Subbarao raised the key repurchase rate by a quarter of a percentage point last month to a two-year high of 6.5 percent and pledged to persist with an “anti-inflationary monetary stance” as he lifted the nation’s inflation forecast because of higher food costs.
Inflation Forecast

India’s benchmark wholesale-price inflation rate may be at 7 percent by March 31, more than the 5.5 percent estimated earlier, Subbarao said. The gauge stood at 8.43 percent in December.

In China, where industrial output climbed 13.5 percent in December, the central bank this week increased rates for the third time since mid-October ahead of a report forecast to show inflation accelerated to the fastest pace in 30 months.

IDBI Gilts Ltd. economist Namrata Padhye said demand in some segments of India’s economy, such as real estate, is showing signs of easing. DLF Ltd., India’s biggest real-estate developer, on Feb. 1 said net sales rose 22.4 percent in the quarter through December compared with a 35 percent gain in the previous quarter.

Cement production by companies including Ambuja Cements Ltd., a subsidiary of Holcim Ltd., the world’s second-largest maker of the building material, fell 2.2 percent in December, according to separate government data.
Investor Confidence

Investor confidence in India may be hurt as rising rates cause growth to slow, Robert Prior-Wandesforde, the Singapore- based head of India and Southeast Asia economics at Credit Suisse, said on Feb. 9.

The pace of India’s economic expansion may drop to 7.7 percent in the year ending March 31, 2012, from an estimated 8.4 percent this year, Prior-Wandesforde said.

Samiran Chakraborty, a Mumbai-based economist at Standard Chartered, this month reduced his growth projection for the period to 8.1 percent from 8.8 percent.

The government on Feb. 7 predicted gross domestic product will gain 8.6 percent in the year ending March 31, the fastest pace in three years.

Citigroup Inc. this week recommended investors buy Indian shares, saying analysts had become “overly pessimistic” on the outlook for corporate earnings.

Subbarao said Jan. 25 that India’s production data has been “volatile” this year and that company sales, indirect tax collections and leading indicators of growth in services suggest “persistence of the growth momentum.”

Car sales in India rose 26 percent to a record in January, adding to evidence of strong consumer demand. Excise tax collections in the nine months through December rose about 34 percent, indicating growing sales at companies.

“There are some segments that are looking strong while others aren’t,” said IDBI Gilts’ Padhye. “One needs to look at numbers for the next couple of months to firmly establish growth is slowing.”