Indian factory output up at slowest pace since '02

India's industrial production grew at the slowest pace since 2002 in March as borrowing costs at a six-year high discouraged consumers from buying cars and motorcycles.

Production at factories, utilities and mines rose 3 percent from a year earlier after gaining 8.6 percent in February, the statistics office said in New Delhi yesterday. Economists surveyed forecast a 5.8 percent increase.

The fastest price gains in three years are preventing the central bank from lowering the central bank's 7.75 percent benchmark lending rate, weighing on companies who rely on consumers. Sales at Maruti Suzuki India Ltd, the maker of half the cars sold in India, fell for the first time in more than two years in March.

"Industry is facing headwinds from tight monetary conditions, high raw-material costs and weakening foreign demand," said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. "There is unlikely to be much scope to cut policy rates in 2008 to boost domestic demand."

Stocks fell and bonds rose after the report. The Sensitive Index, or Sensex, declined 0.1 percent to 16,716.54 as of 2:18 pm in Mumbai. The index has lost 18 percent of its value this year. The yield on India's 10-year note fell 0.07 percentage point to 7.83 percent.

Production growth may have slowed because of an "unfavorable base effect" caused by the index rising to a record in March 2007, according to Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. Despite the slowdown, the output index climbed to a record 297.8 in March, yesterday's report showed.

The Reserve Bank of India last month twice raised the proportion of deposits that lenders must set aside as reserves to prevent money supply in the system from adding to inflation. The ratio is now at a seven-year high of 8.25 percent. The bank wants to cool inflation.

Higher borrowing costs are discouraging spending by consumers who rely on loans to buy cars and motorbikes. Car sales rose 12 percent in the fiscal year, slower than the 22 percent gain in the previous period.

"Higher interest rates have significantly impacted the businesses dependent on consumer loans," said Sunil Kant Munjal, Managing Director of Hero Group, which owns Hero Honda Motors Ltd, India's biggest motorcycle maker. "There is a need for rates to come down."

Electricity, mining

Manufacturing, which accounts for about 80 percent of India's industrial production, gained 2.9 percent in March, compared with a 16 percent increase a year ago, according to yesterday's report.

Electricity output rose 3.7 percent, mining grew 3.8 percent and consumer goods production fell 0.1 percent.

"Given the current situation of high inflationary pressures, we do not expect interest rates to come down and consumer spending may therefore remain subdued during the next six months," said Kaushal Sampat, an analyst at Dun & Bradstreet.

Still, Finance Minister Palaniappan Chidambaram's Feb 29 budget announcement to reduce the tax burden on individuals and the proposed higher salaries for 4 million government employees may help accelerate consumption and spur industrial growth, economists said.

Agencies

(China Daily 05/13/2008 page16)