Surprise slowdown in India industrial output

An employee works inside a production site in Gujarat, India.Photo: Reuters

India's industrial output slowed unexpectedly in February, posting a modest rise of 3.6 percent year-on-year as higher interest rates put the brakes on manufacturing, data showed Monday.
Output by factories, mines and utilities was below analysts' forecasts of 5.2 percent and lower than January's 3.95-percent year-on-year growth. It was far below the 15.1-percent growth registered in February 2010.
The slowdown reflects the "aggressive monetary tightening by the Reserve Bank of India (which) discourages businesses from investing," said Matt Robinson, economist at Moody's Analytics.
But economists said India's hawkish central bank, which has raised rates eight times in a year, would ignore the weaker data and continue to tighten monetary policy to tackle inflation, entrenched above eight percent.
Credit Suisse economist Robert Prior-Wandesforde said he doubted "very much" the downbeat data would dissuade the bank from hiking rates again at its next meeting on May 3.
Inflation has been one of the biggest headaches for the embattled Congress-led government, which is also reeling from a slew of corruption scandals.
Poor households, the backbone of the Congress party's support, have been especially hurt by rises in the cost of living.
Manufacturing output, which accounts for 80 percent of the industrial index, rose a scant 3.5 percent in February against a year earlier, down from 16.1 percent registered in February 2010.
India's lacklustre performance contrasted with neighbouring China's industrial production, which expanded by 14.1 percent in the first two months of the year compared with the same period in 2010.
India's output of capital goods such as construction, factory and other equipment shrank by 18.4 percent year-on-year in February after expanding by 46.7 percent a year earlier as rate hikes made it costlier for businesses to borrow money to invest.
Economists said the fall in capital goods spending was a bad omen for investment spending needed to power overall economic growth.
Businesses said they feared India's growth was losing traction.
"Capacity additions and investments in the industrial, particularly capital goods, sector are critically needed to maintain the industrial growth rate," said Rajiv Kuumar, director general of the Federation of Chambers of Commerce and Industry.
"These are beginning to be impacted both by the higher cost of capital," he said.
India's government expects the economy to expand by 9.0 percent this fiscal year ending in March 2012, beating the previous year's 8.6 percent growth.
But private economists say expansion may slacken to as low as 7.2 percent as resurgent oil prices, a stronger currency and rate hikes cut into growth.
"We remain particularly nervous about the impact of the monetary tightening on interest-rate sensitive parts of the economy," said Prior-Wandesforde.
"The jump in oil and other input prices is also likely to take its toll on profit margins," added the economist, who recently shaved his GDP growth forecast to 7.5 percent from 7.7 percent.
Such growth is enviable by Western standards but it is far below the double-digit levels India's government says are needed to raise the living standards of the country's impoverished millions.