Indian Factory Output Grows at Slowest Pace on Record

By Kartik Goyal

Oct. 10 (Bloomberg) -- India's industrial production grew at the weakest pace on record as interest rates at a seven-year high damped consumer spending and companies cut output amid the global credit crisis.

Output at factories, utilities and mines rose 1.3 percent in August from a year earlier after a revised 7.4 percent gain in July, the Central Statistical Organization said in New Delhi today. Economists surveyed estimated an increase of 6 percent.

The risk of a global recession has risen since August as the worst financial crisis since the Great Depression erased $12 trillion from world stock markets. India's central bank today cut the amount of cash lenders need to set aside as reserves to cushion the economy from a global slowdown, after the rupee slumped to a record low and overnight lending rates doubled.

``The record high interest rates are taking a toll on consumer spending,'' Ramya Suryanarayanan, an economist at DBS Bank Ltd. in Singapore. ``The outlook going forward is looking very, very bad as the global turmoil will exacerbate India's problems.''

Production fell the most since the current index was first compiled in 1994. Manufacturing, which accounts for about 80 percent of total output, gained 1.1 percent in August from 8 percent in July. Electricity output rose 0.8 percent in August from 4.5 percent. Capital goods production rose 2.3 percent, a tenth of the pace of July.

Bonds rose, causing the yield on the benchmark 10-year note to fall 25 basis points to 7.73 percent as of 12:20 p.m. in Mumbai. The Sensitive Index of stocks plunged 9.4 percent, and is poised for its worst week in almost 18 years.

Global Recession

The International Monetary Fund this week said advanced economies will expand next year at the slowest pace since 1982, sapping growth from India to Russia. IMF Managing Director Dominique Strauss-Kahn said the world economy is ``on the cusp'' of a recession.

``The continued global financial market turmoil is certainly the biggest threat to industrial production growth in the coming months,'' said Sherman Chan, an economist at Moody's Economy.com in Sydney. ``I expect exports to slow sharply in the next six months or so.''

India will grow 6.9 percent in 2009, slower than 8 percent projected in July, the IMF said. Asia's third-largest economy will expand 7.9 percent this year, it said, cooling from 9.3 percent in 2007.

Slowing Exports

Exports grew 27 percent in August from a year earlier, slower than a 31.2 percent gain in July.

The global downturn and slower inflation may give central bank Governor Duvvuri Subbarao room to stop raising interest rates after three increases since June to stem price gains.

Higher borrowing costs and prices have discouraged 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 percent in July, the Society of Indian Automobile Manufacturers said this week.

Still, factory output may get a boost in the coming months as rising wages for public servants increases spending at home. Prime Minister Manmohan Singh announced an average 21 percent wage increase for about 5 million government workers in August.

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