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June infrastructure output jumps, WPI falls

June infrastructure output jumps, WPI falls
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First Published: Fri, Jul 24 2009. 01 15 AM IST
Updated: Fri, Jul 24 2009. 05 32 PM IST
New Delhi: Indian infrastructure output grew in June at its fastest pace in 18 months in a sign of improving economic activity while wholesale prices fell for the sixth straight week, bolstering expectations the Reserve Bank of India (RBI) will hold rates steady at next week’s policy review.
The six infrastructure industries -- crude oil, refining, coal, electricity, cement and steel -- together grew at an annual rate of 6.5% in June, faster than the previous month’s rise of 2.8%, data showed on Thursday.
Separate data showed the wholesale price index fell 1.17% in the 12 months to 11 July, matching a median forecast in a Reuters poll.
“Importantly, the demand-side pressures on inflation remain subdued,” said Gunjan Gulati, economist at JPMorgan Chase.
“Thus, on the policy front, I do not see the RBI shifting from its easy policy stance, especially since the demand side of the economy is still soft,” he said, referring to the RBI.
While the wholesale price index is showing a negative reading due to statistical aberration, India’s consumer price index continues to remain firm at 8.63% until May.
The central bank will review its interest rate policy on 28 July, and a Reuters poll of analysts shows interest rates are expected to remain steady.
The RBI has cut its key lending rate by 425 basis points since October to lower borrowing costs for firms hit hard by the domestic slowdown and the global slump.
Some officials have said a soft interest rate regime is needed for the rest of the fiscal year to help Asia’s No.3 economy return to a higher growth path seen between 2005 to 2008.
“The main priority of the government and the central bank will be to revive growth and we expect the central bank to hold rates at the policy review,” said Sujan Hajra, chief economist at Anand Rathi Securities.
Bond yields eased slightly on the WPI data. The most-traded 6.07% 2014 government bond traded at 6.50%, lower than the previous close of 6.52%.
Bottlenecks
Faster growth in infrastructure, which contributes more than a quarter to overall industrial output, raises hopes of accelerated economic growth in 2009-10 (April-March).
“The main signal from this is the domestic demand is improving and the worst is behind us,” said Hajra.
Shares in infrastructure firms such as Reliance Infrastructure, DLF, Jaiprakash and Larsen & Toubro rose 1.8-4.2%. The benchmark index was up 1.5% at 0800 GMT.
Foreign investors cite pot-holed roads, frequent power cuts, and congestion at ports and airports as a deterrent to doing business in Asia’s third largest economy.
The high cost of borrowing and reluctance from bankers to fund long-gestation projects have also left private investors wary of investing in infrastructure projects.
A severe liquidity crunch globally and then a slowdown since last October stalled many big projects as private firms fumbled to arrange funds for expansion.
The government has cut duties and stepped up spending on infrastructure projects to stimulate the economy, and its budget for 2009-10 focused on infrastructure to drive economic growth and generate more jobs.
Infrastructure investment makes up less than 6% of India’s gross domestic product and the government aims to increase it to 9%, which means the country will require close to $500 billion in the five-year period to March 2012.
The economy expanded by 6.7% in 2008-09, slower than 9% or more in previous three years, and government officials expect it to be around 7% this year.
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First Published: Fri, Jul 24 2009. 01 15 AM IST