India's Industrial Production Grows at Slowest Pace in 6 Years

By Kartik Goyal

July 11 (Bloomberg) -- India's industrial production grew at the slowest pace in more than six years in May as spiraling prices prompted consumers to cut back on purchases of cars, fridges and other manufactured goods.

Production at factories, utilities and mines rose 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, the statistics office said in New Delhi today. Economists expected a 6.5 percent increase.

Manufacturing output may weaken further as the fastest inflation since 1995 dents spending and makes it more likely the central bank will raise interest rates for a third time this year. Maruti Suzuki India Ltd., which produces half the cars sold in Asia's third-largest economy, and truck maker Tata Motors Ltd. trimmed output in May as higher borrowing costs discouraged buyers.

``With continued interest rate hikes, weakening foreign demand and rising costs of production, we are becoming more concerned about the outlook for industrial output,'' said Sonal Varma, an economist with Lehman Brothers Inc. in Mumbai. ``We expect production to moderate this year.''

Accelerating inflation, fuelled by soaring oil and commodities prices, and weaker global demand are hurting industrial production across Asia. Manufacturing in Singapore posted its biggest fall in two years in May. South Korea's output increased 8.3 percent in the same month, easing from a 10.4 percent gain in April.

Concern over weaker industrial output has contributed to a 31 percent decline in the Bombay Stock Exchange's benchmark Sensitive Index this year. Higher interest rates are also damping investor confidence.

Interest Rates

The Reserve Bank of India last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, aiming to tame inflation that reached 11.89 percent last month.

The increased cost of funds prompted lenders such as State Bank of India Ltd., the nation's biggest, ICICI Bank Ltd. and HDFC Bank Ltd. to raise lending rates. Higher borrowing costs may discourage consumer borrowing in a country where the majority of automobiles and apartments are bought on loans.

Maruti, Ford India Private Ltd. and Honda Siel Cars India Ltd. produced fewer cars in May, according to the Society of Indian Automobile Manufacturers. Ford produced 3,414 cars in May, about four times less from a year ago. Honda Siel Cars made 43 percent fewer vehicles.

`Tremendous Pressure'

``Profit margins of automakers are under tremendous pressure,'' said Sugato Sen, director of the Society of Indian Automobile Manufacturers. ``Production may decline in the coming months on higher interest rates and record inflation.''

Manufacturing, which accounts for about 80 percent of India's industrial production, gained 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.

Cement sales by companies such as Grasim Industries Ltd., India Cements Ltd. and other producers grew 4 percent in May, less than April's 7.2 percent gain, according to the Cement Manufacturer's Association.

A slowdown in exports of Indian clothes, steel and electronics goods may also have contributed to the drop in factory output. India's overseas sales rose 13 percent in May from a year ago, less than half of April's 31.5 percent growth.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.