Indian Output Rises Before Higher Rates Impact Demand

By Kartik Goyal

Sept. 12 (Bloomberg) -- India's industrial production growth accelerated to a five-month high in July, before higher interest rates had a chance to damp consumer spending.

Output at factories, utilities and mines rose 7.1 percent from a year earlier after a 5.4 percent gain in June, the Central Statistical Organisation said in New Delhi today. Economists expected an increase of 6 percent.

Production may slow after the central bank raised borrowing costs three times in as many months to tackle the fastest inflation in 16 years. Tractor maker Mahindra & Mahindra Ltd. and Maruti Suzuki India Ltd., which makes half the cars sold in India, are already reporting weaker sales, and the nation's output growth in 2008 has averaged half last year's pace.

``The increase in interest rates has severely impacted industrial activity,'' said Sajjan Jindal, managing director of JSW Steel Ltd., India's third-largest steelmaker. Companies are deferring expansion plans as they incur losses due to rising input costs, he said.

Faster inflation, fuelled by surging energy and commodity prices, is damping consumer demand and cutting industrial production across Asia. China's production grew 12.8 percent in August from a year earlier, the slowest pace in six years. Singapore's factory output in July fell the most in two years.


Interest Rates

India's central bank on July 29 increased its benchmark interest rate by a half point to a seven-year high of 9 percent after raising it twice in June. Governor Duvvuri Subbarao, who took over the top job at the Reserve Bank of India last week, is grappling with inflation running at 12.1 percent.

Manufacturing, which accounts for about 80 percent of Indian production, gained 7.5 percent in July from 6.1 percent in June, today's report showed. Electricity output rose 4.5 percent in July from 2.6 percent, mining grew 5 percent and consumer-goods production increased 7.3 percent. Capital goods production rose 21.9 percent in the month, compared with 12.3 percent in June.

Concerns that a slowdown in industrial growth may hurt corporate profits have resulted in the Bombay Stock Exchange's benchmark index declining 26 percent this year. The Sensitive Index pared losses today after industrial production for July beat expectations.

Bonds were little changed. The yield on the benchmark 8.24 percent security maturing in April 2018 was at 8.27 percent as of 12:10 p.m. in Mumbai, from 8.28 percent before the data, according to the central bank's trading system.

`Remain Subdued'

``The trend going forward for production growth will remain subdued due to higher interest rates and accelerating inflation,'' said Kaushik Das, an economist at Mumbai-based Kotak Mahindra Bank Ltd.

Prime Minister Manmohan Singh last week urged companies to raise output to counter inflation. ``To ensure non-inflationary growth we must step up production in all sectors,'' Singh said.

Higher interest rates have begun to discourage spending by consumers who rely on loans to buy cars and motorbikes. Passenger car sales in India fell 4.4 percent in August from a year earlier after declining 1.7 per cent in July, the Society of Indian Automobile Manufacturers said yesterday.

Weaker industrial production may deepen India's economic slowdown. Asia's third-biggest economy is forecast by the central bank to grow 8 percent in the fiscal year to March 2009, the slowest pace of expansion in four years.

Still, industrial production may get a boost in the coming months as Prime Minister Singh announced an average 21 percent wage increase for about 5 million government workers in August.

Indians are expected to receive an average 14.8 percent pay rise this year, the highest in the Asia Pacific region, according to human resources firm Hewitt Associates. That compares with 15.1 percent in 2007.

That may limit the damage that higher borrowing costs and runaway inflation will have on consumer spending, said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's.

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