India's Factory Output Accelerates Ahead of Festivals

By Kartik Goyal

Nov. 12 (Bloomberg) -- India's industrial production growth accelerated in September, as companies raised output to build up stocks ahead of religious festivals.

Output at factories, utilities and mines rose 4.8 percent from a year earlier after a revised 1.4 percent gain in August, the Central Statistical Organization said in New Delhi today. That was more than the median forecast of a 4.1 percent increase in a Bloomberg News survey.

Indian automakers raised production in September to meet anticipated demand ahead of the Hindu festival of Deepavali in October, which is considered to be an auspicious time to make large purchases. Manufacturing may still slow this year as the global credit crunch causes a shortage of money in India's financial system, affecting the ability of banks to extend loans.

``Production growth will remain subdued until next year,'' said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd. the local unit of Standard & Poor's. ``Interest rates need to be lowered to give a real boost to demand.''

Stocks erased losses after the release of the production figures. The benchmark Bombay Stock Exchange Sensitive Index gained 2.2 percent to 9,928 at 12:19 p.m. in Mumbai. The index earlier declined to 9,559.

India's factory output rose 4.9 percent in the six months to September from a year earlier, less than half the 9.5 percent pace recorded in 2007, according to today's report.

Financial Crisis

The global financial turmoil is curbing industrial output across Asia as a slowdown in the U.S. and Europe crimps demand for the region's exports. Industrial production in China grew 11.4 percent in September, the slowest pace in six years. Production in South Korea declined for a third month.

India's central bank on Nov. 1 cut its benchmark repurchase rate by 1.5 percentage points in two stages starting Oct. 20 to 7.5 percent from a seven-year high of 9 percent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending.

Some state-run banks in India reduced lending rates after Finance Minister Palaniappan Chidambaram on Nov. 4 said he had ``impressed upon banks to ensure the delivery of credit at an appropriate price.'' State Bank of India, the country's largest, cut the rate it charges its best clients to 13 percent last week from 13.75 percent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge.

`Very High'

The cost of funds ``remains very high'' even after the Reserve Bank of India lowered policy rates, said Bimal Jalan, a former central bank governor. ``We need to create conditions so that loans are available at interest rates at a pre-crisis levels as other sources of finances have dried up.''

India's exports grew 15 percent from a year earlier in September, the slowest pace in 18 months, as a weakening global economy damped demand for the nation's products.

Prime Minister Manmohan Singh last week urged industry to avoid any ``knee-jerk reaction such as large-scale job cuts'' to counter the impact of the financial crisis.

Manufacturing, which accounts for about 80 percent of total output, gained 4.8 percent in September from 1.4 percent in August. Electricity output 4.4 rose percent last month from 0.8 percent in August. Capital goods production rose 18.8 percent in September from 0.9 percent in August and consumer goods rose 13.1 percent from 3.9 percent August.

The industrial production numbers were ``encouraging,'' Finance Minister Chidambaram told reporters in New Delhi today. The growth in capital goods sector has been impressive, he said.

Cars, Motorcycles

India's passenger-car sales rose for the first time in three months in September, led by Hyundai Motor Co. and Maruti Suzuki India Ltd., as dealers stocked up before religious festivals that are peak demand periods. Hyundai sold 24 percent more cars in September and Maruti, India's largest carmaker, reported a 0.3 percent increase in sales.

Passenger car sales subsequently fell 6.6 percent in October, the most in more than three years, the Society of Indian Automobile Manufacturers said this week. Vehicles sales, also including trucks, two-wheeled scooters and motorcycles, tumbled 14 percent, the biggest drop in almost eight years, the automobile grouping said Nov. 10.

The slowdown in production and exports may hurt the pace of India's economic expansion, forecast by the central bank to weaken to a four-year low. The $1.2 trillion economy is expected to grow 7.5 percent in the year to March 2009.

India plans to accelerate spending on building roads, ports, utilities and other infrastructure to stimulate growth, according to Prime Minister Singh. ``Expanding investment in infrastructure can play an important counter-cyclical role,'' Singh said Nov. 3. The government estimates the South Asian nation will need an investment of $500 billion in the next five years for its infrastructure needs.

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