facebook-page-view
Advertisement

August Industrial Output Up 4.1%, Growth Below Estimates

By Reuters

  • 12 Oct 2011

India's industrial output rose a lower-than-expected 4.1 per cent in August, in further evidence of a slowdown in Asia's third-largest economy as high interest rates, rising prices and the global slowdown curb investment and demand.

Whether that cooling is enough to prompt the RBI to pause in a rate tightening cycle that has seen 12 increases since March 2010 may be determined by Friday's September headline inflation data release.

Reserve Bank of India (RBI) deputy governor Subir Gokarn on Wednesday said further rate increases will depend on the inflation situation.

Advertisement

"With sluggish growth and an unrelenting inflation level, the task for the RBI in the forthcoming policy meet will remain challenging," said Shakti Satapathy, fixed-income strategist at A.K. Capital in Mumbai.

Wednesday's industrial output reading lagged the forecast for 5 per cent growth in a Reuters poll, and is only a slight improvement on the revised 3.84 per cent growth clocked in July.

India's 10-year bond yield jumped 2 basis points to 8.73 per cent after the data release.

Advertisement

The weakness in India's industrial sector mirrors a worldwide trend of stalling factory activity and a worryingly weak pace of new orders, reinforcing concerns of another global recession.

India, which is largely driven by domestic demand, is relatively more insulated from the global turmoil. Its exports, while not a major growth contributor, jumped 54 per cent in the first five months of the current financial year to end-March, suggesting inflation may be a bigger worry than growth.

Inflation was nearly 9.8 per cent in August, the highest rate in more than a year. A Reuters poll this week pegged September's inflation a tad lower at 9.70 per cent.

Advertisement

Still, industrial output continues to lag broader economic growth in India, which slowed to 7.7 per cent in the April-June quarter, its softest in six quarters, while manufacturing growth was the weakest in two-and-a-half years.

On Monday, an industry body cut its sales growth target for cars in this fiscal year to 2-4 per cent, a sharp drop from the 30 per cent growth clocked in the previous year.

Infrastructure sectors such as coal and cement, key to India's growth and contributing about 38 per cent to the index of industrial output, grew just 3.5 per cent in August.

Advertisement

In August, the capital goods sector grew 3.9 per cent after contracting almost 14 per cent in July. This data is known to be volatile however, and the rebound may not indicate an industrial recovery.

Manufacturing output, which constitutes about 76 per cent of the industrial production, rose an annual 4.5 per cent in August.

In its Sept. 16 review, the RBI had said that a premature change in the policy stance could harden inflationary expectations, diluting the impact of past policy actions.

Advertisement

Its next rate decision is on Oct. 25. A Reuters poll last month found that economists expect one more interest rate increase in 2011, which would make India an outlier in a world where most central banks are looking to stimulate growth.

Says Radhika Rao, an economist with Forecast Pte, Singapore, "Base effects, however, mask the slowdown in activity on sequential basis as higher borrowing costs and increase in fuel/raw material prices impinge on activity.

"Month ahead could see modest boost from festive demand, which will, however, fade into late Q4 and ease well into next year.

Friday's WPI number will be the main determinant of policy action as the RBI remains tolerant to signs of slowdown in consumption and production indicators. We see a lean towards a rate hike in October, likely the last for this fiscal year."

Share article on

Advertisement
Advertisement