Wed, Feb 13, 2008 page11

• India's production up 7.6%

  SLOWDOWN With the pace of economic growth forecast to slow, analysts said the central bank would be under increasing pressure to lower interest rates

  • BLOOMBERG
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  India's industrial production accelerated in December as record investment in factories, roads and power plants boosted demand for cement and steel.

  Production at factories, utilities and mines rose 7.6 percent from a year earlier, after gaining a revised 5.1 percent in November, the statistics office said in a statement in New Delhi. Analysts had forecast a 6.9 percent gain.

  The pace of increases may not last, with the government citing moderating output as a reason growth will slow this year. Signs of a cooling expansion may prompt Reserve Bank of India Governor Yaga Venugopal Reddy to consider cutting interest rates.

  "Capital spending is shoring up industrial output," said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. "The central bank will be under increasing pressure to reduce rates as the economy slows."

  Reddy refrained from lowering rates at the Reserve Bank's last monetary policy announcement on Jan. 29 on concern rising oil and food prices would stoke inflation. Wholesale prices, which rose 4.1 percent in the last week of last month, don't reflect last year's 57 percent increase in crude oil costs.

  The government on Thursday said India's economy may expand 8.7 percent in the 12 months to March 31, the weakest pace in three years, because of slowing manufacturing. Growth was 9.6 percent in the last financial year.

  Higher borrowing costs are prompting consumers to postpone purchases. Bajaj Auto Ltd, India's second-largest motorcycle maker, posted a 16 percent drop in sales last month, its 12th straight month of declines.

  ABN Amro Bank NV's purchasing managers' index indicated manufacturing growth recovered in December from the previous month and fell again last month to the lowest level since September.

  Indian Finance Minister Palaniappan Chidambaram was to meet chairmen of state-run banks yesterday to find ways to reduce interest rates and boost consumer demand. Industrial production growth last year averaged 10.1 percent.

  In response to the minister's call last month for lower rates, State Bank of India, the nation's biggest by assets, on Monday cut its benchmark prime lending rate by 25 basis points to 12.5 percent.

  "The cumulative impact of monetary tightening will soften industrial activity in the coming months," said Rajeev Malik, senior economist at JPMorgan Chase & Co in Singapore. "Higher capital expenditure and infrastructure spending will likely be key offsetting factors."

  Economists are split whether the central bank will immediately start cutting its benchmark rate because inflation stoked by higher oil and food costs presents a threat. Six of nine economists surveyed by Bloomberg News last month said Reddy would maintain the repurchase rate at 7.75 percent -- the highest in six years -- in the next monetary policy statement on April 29.

  Indian Prime Minister Manmohan Singh's government is spending 1.34 trillion rupees (US$34 billion) in the year ending March 31, a 40 percent increase over the previous year, on roads, ports and power plants.

  Companies are also expanding, encouraged by India's economic growth and on optimism rising incomes will stoke higher demand. Automakers, including General Motors Corp and Suzuki Motor Corp, are spending more than US$6.6 billion to build new factories in the South Asian nation.

  Economic expansion in India is still the second-fastest after China of the world's biggest economies. The economy has grown an average 8.8 percent since 2003, the fastest expansion since the country's independence in 1947.

  India's middle class, defined as those with annual disposable incomes between US$4,380 and US$21,890, has more than doubled to 50 million in the past decade, said McKinsey & Co.
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