By Kartik Goyal
March 12 (Bloomberg) -- India posted its first back-to-back decline in industrial production in 16 years, suggesting tax cuts and lower interest rates are yet to resuscitate demand in an economy faced with the worst slowdown since 2003.
Output at factories, utilities and mines fell 0.5 percent in January from a year earlier after a revised 0.6 percent drop in December, the Central Statistical Organization said in New Delhi today. Economists expected a 0.9 percent contraction.
Factory output in India is being pummeled as the global recession cuts demand for exports and job losses hurt consumer spending. Prime Minister Manmohan Singh has reduced taxes on consumer products and the central bank slashed interest rates to a record low to revive an economy that some analysts fear may slow further as elections in April and May stymie policymaking in the world’s biggest democracy.
India’s industrial sector may “remain firmly in the doldrums for some months yet as the veritable collapse in external demand continues to take its toll,” said Robert Prior- Wandesforde, an economist at HSBC Holdings Plc in Singapore. “It won’t be until the third quarter of calendar 2009 that production is likely to begin to show a meaningful turn.”
Shares pared gains after today’s report. India’s benchmark stock market index fell 0.7 percent to 8,300 from 8,360 before the data was released. The measure has declined 15.47 percent this year, extending 2008’s 53 percent drop, on concern the slowdown in demand will crimp profits of local companies.
Global Recession
Worldwide industrial production this year is expected to be as much as 15 percent lower than in 2008 and the global economy is likely to shrink for the first time since World War II, the World Bank said March 9.
India isn’t the only Asian nation suffering from weaker overseas demand. Japan’s industrial production fell 30.8 percent in January from a year earlier and factory output in Singapore plunged 29.1 percent.
Exports from India fell the most in a decade in January amid the global economic slump. Merchandise shipments dropped 16 percent to $12.38 billion, the fourth straight monthly fall.
India’s economy may not achieve its 7 percent growth target for the year to March 31, 2009, central bank Governor Duvvuri Subbarao told Nikkei English News in an interview. The $1.2 trillion economy grew 5.3 percent in the three months to Dec. 31, the weakest expansion since the last quarter of 2003.
Manufacturing, Mining
The pace of economic growth may weaken to 6.4 percent next fiscal year, said Sonal Varma, an economist with Nomura International Plc in Mumbai.
Manufacturing, which accounts for about 80 percent of India’s total output, fell 0.8 percent in January, compared with a 1 percent fall in December, today’s report showed. Mining dropped 0.4 percent, compared with 1.8 percent in the previous month, while electricity production rose 1.8 percent from a 1.6 percent gain. Basis-goods production fell 1 percent.
To help bolster growth in South Asia’s biggest economy, the central bank last week cut the key overnight lending rate for lenders for the fifth time since October. The bank reduced its key repurchase rate to an all-time low of 5 percent from 5.5 percent. The bank has cut the rate by 400 basis points.
The central bank has been able to reduce borrowing costs as inflation is slowing. India’s benchmark wholesale-price index eased to 2.43 percent in the week to Feb. 28, according to a separate report today. That’s the lowest in more than six years.
Stimulus Packages
Prime Minister Singh’s government has also announced three stimulus packages since December. Initiatives have included tax cuts on consumer products and services and higher spending on roads, ports and utilities.
Acting Finance Minister Pranab Mukherjee on Feb. 24 lowered excise duty to 8 percent from 10 percent and the service tax to 10 percent from 12 percent. He extended a 4 percentage point reduction in central value-added tax announced in December to beyond March 31.
Faltering sales are forcing companies such as Honda Motor Co. and Hyundai Motor Co. to idle plants and fire workers. Honda has reduced Indian output by half since the beginning of the year and cut about 1,000 temporary jobs since August, the Press Trust of India reported Feb. 27.
Falling exports may cause about 10 million job losses by March, according to estimates from the Federation of Indian Export Organisations, a lobby group. Exporters have already sacked 1 million workers, Trade Secretary Gopal K. Pillai said.
India’s car sales declined for four consecutive months starting in October as the slowest economic expansion since 2003 reduced new jobs.
Still, excise-duty cuts, lower loan rates and higher spending by the government on roads, ports and utilities may help revive demand in the coming months, said Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers. “It’s too early to predict a reversal in trend,” he said.
India’s passenger-car sales climbed for the first time in five months in February as lower auto-loan rates spurred demand for Maruti Suzuki India Ltd. and Hyundai Motor Co. vehicles.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
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