India's Production Growth Accelerated to 5.4% in June

By Kartik Goyal

Aug. 12 (Bloomberg) -- India's industrial production growth accelerated in June, before higher interest rates had a chance to crimp consumer spending.

Output at factories, utilities and mines rose 5.4 percent from a year earlier after a revised 4.1 percent gain in May, the Central Statistical Organisation said in a statement in New Delhi today. That matched the median forecast in a Bloomberg News survey of 23 economists.

Factory output may slow in coming months after the central bank raised borrowing costs three times since June to tame runaway inflation. Sales growth is already easing at Tata Motors Ltd. and Maruti Suzuki India Ltd., which makes half the cars sold in India.

``Production growth will remain weak this year due to rising interest rates and higher input costs,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``Weakening overseas sales are also weighing on companies' output.''

The Bombay Stock Exchange's benchmark Sensitive Index, which has declined about 25 percent this year amid concern weaker growth will crimp corporate earnings, fell 2 percent to 15,206.6 at 2:19 p.m. in Mumbai.

The Reserve Bank of India on July 29 raised the repurchase rate to 9 percent from 8.5 percent, after two increases in June. Governor Yaga Venugopal Reddy is grappling with inflation running at 12.01 percent, the fastest pace in 13 years.

Elsewhere in Asia

Reddy isn't the only central banker in Asia who is increasing borrowing costs, with policy makers across the region raising interest rates as higher food and fuel prices threaten inflation targets. Indonesia, Thailand, Pakistan and the Philippines all lifted their benchmark rates last month.

Higher borrowing costs are hurting Asian manufacturers. Japan's industrial production growth halted in June and South Korea's 6.7 percent pace was the slowest in nine months.

Factory output, which accounts for about a quarter of India's $912 billion economy, grew 5.2 percent in three months ended June 30, compared with a 10.3 percent gain in the same period a year ago.

Manufacturing, which accounts for about 80 percent of Indian production, gained 5.9 percent in June, compared with 9.7 percent in June last year, today's report showed. Electricity output rose 2.6 percent in June from 6.8 percent in a year-ago, mining grew 2.9 percent from 1.5 percent and consumer-goods production increased 10 percent.

Cars, Motorcycles

Production growth partly rose in June due to a base effect caused by the index dropping to 255.3 in June 2007, according to economists including Saugata Bhattacharya at Axis Bank Ltd. in Mumbai. The output index rose to 269.1 in June this year, today's report showed.

Higher interest rates have begun to discourage spending by consumers who rely on loans to buy cars and motorbikes. Sales at Maruti Suzuki increased 1.1 percent in July, the slowest pace in four months. Sales at Tata Motors, India's biggest truck maker, fell 3.3 percent in July as demand declined.

The central bank's fight against inflation will result in a ``compromise'' on economic growth, India's Junior Finance Minister Pawan Kumar Bansal said in an interview with Bloomberg News earlier this month.

India's economy, the third-biggest in Asia, is forecast by the central bank to grow 8 percent in the fiscal year that started April 1. That would be the slowest pace in four years.

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