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Acceleration in India’s production capacities

Acceleration in India’s production capacities
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First Published: Wed, Apr 11 2007. 02 35 PM IST
Updated: Wed, Apr 11 2007. 02 35 PM IST
Cherian Thomas/ Bloomberg
New Delhi: India’s industrial production growth has accelerated in February, vindicating the central bank’s unexpected interest rate increase a fortnight ago to damp consumer demand and curb inflation.
Production at factories, utilities and mines rose 11.2% from a year earlier, following January’s 10.9% gain, according to the median forecast of 12 economists in a Bloomberg survey.
RBI which has increased its lending rate to a five-year high, may refrain from raising borrowing costs in its scheduled 24 April monetary policy announcement. The central bank on 30 March raised its key overnight lending rate and banks’ reserve requirement as unprecedented demand for manufactured goods kept inflation above its target for 16 straight weeks.
“The Reserve Bank may prefer to wait and see the impact of recent monetary policy actions on consumer demand and inflation,” said D. H. Pai Panandiker, president of RPG Foundation, an economic policy group based in the capital. “Interest rate increases in the past four months have been quite aggressive.”
Cash Reserves
Reserve Bank Governor Yaga Venugopal Reddy on 30 March raised the cash reserve ratio, or the amount of cash lenders must set aside against deposits, for the third time since December and increased the benchmark overnight lending rate for the sixth time in 15 months.
Commercial banks have increased their lending rates by between 200 basis points and 250 basis points in the past four months. ICICI Bank Ltd., India’s biggest by market value, on 31 March increased its prime lending rate for the fourth time since December. A basis point is 0.01 percentage point.
Reddy wants to slow bank loans that have grown at a record 30% in each of the past three years, stoking inflation, which was near a two-year high of 6.39% in the week ended 24 March. Reddy had forecast inflation to be between 5% and 5.5% by 31 March.
Slower Growth
Climbing rates will slow India’s $854 billion economy to an 8% growth in the year ending 31 March, the Asian Development Bank and Goldman Sachs Group Inc said last week. HSBC Holdings Plc expects a 7.8% expansion. India’s economy grew 9.2 % in the previous year, the government estimates. Industrial output makes up a quarter of the economy.
Companies including Ashok Leyland Ltd., India’s second- biggest maker of trucks and buses, have said rising rates will hurt demand for commercial vehicle manufacturers. Bajaj Auto Ltd., India’s second-biggest motorcycle maker, on 1 April said sales declined 9 percent in March.
Finance Minister Palaniappan Chidambaram, who wants to sustain faster economic growth, said 30 March that the government supports Reddy’s actions to contain inflation.
Chidambaram’s Congress party blamed inflation for state election losses in February. The party currently faces polls in the northern state of Uttar Pradesh, the country’s most populous. The election, which started on 7 April, will be staggered over a month and will set the tone for general elections due in about two years time.
Rising Salaries
Demand is also being aided by rising salaries. Workers in India this year can expect a 7% increase in annual real salary, after adjusting for inflation, the biggest rise among the 45 countries including U.S. and Japan surveyed by human resources consultant ECA International.
Industries such as steel and cement are also benefiting from Prime Minister Manmohan Singh’s decision to increase infrastructure spending by 40% to Rs1.34 trillion ($30.2 billion) in the year starting 1 April in a bid to attract more overseas manufacturing companies.
Singh’s government is also seeking investments of $320 billion by 2012 to improve roads, airports and other infrastructure to attract foreign companies, create jobs and sustain growth of over 9% in the next decade to eradicate poverty. The World Bank estimates more than half of India’s 1.1 billion people still live on less than $1 a day.
“The outlook for the medium term is a bit clouded given recent tightening measures,” Citigroup Global Markets Inc. economists Rohini Malkani and Anushka Shah said in a report on 4 April. “However, given the continuation of key growth drivers, such as an investment cycle upturn and urban consumption, we expect economic growth to sustain around 9% in the current fiscal.”
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First Published: Wed, Apr 11 2007. 02 35 PM IST
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