By Cherian Thomas, Bloomberg
New Delhi: India’s industrial production probably grew more than 10% for a third month in January, indicating the central bank may have to raise interest rates further to damp consumer demand that’s stoking inflation.
Production at factories, utilities and mines rose 10.1% from a year ago, following December’s 11.1% gain, according to the median forecast of 14 economists in a Bloomberg New survey.
Companies including Maruti Udyog Ltd and Reliance Industries Ltd are producing more cars and oil products in Asia’s fourth-largest economy as record bank lending and higher salaries spur consumer spending. Rising demand has pushed inflation to a two-year high and may prompt the Reserve Bank of India (RBI) to increase its key overnight lending rate next month for the second time this year.
“The strength of industrial production suggests monetary conditions are still easy,” said Shashanka Bhide, an economist at the National Council of Applied Economic Research in New Delhi. “The central bank may raise interest rates again.”
India’s $854 billion economy will probably expand a record 9.2% in the year to 31 March, following a 9% growth in the previous year, the government said on 7 February. The economy has grown at an average 8.6 % pace since 2003, the fastest expansion in the country’s 60-year independent history.
RBI Governor Y. Vl. Reddy has raised the central bank’s overnight lending rate to a four-year high of 7.5% to slow inflation, currently at 6.05%. Manufacturing inflation is at the highest in almost two years.
China’s industrial production gained 14.7% in December after 14.9% growth in the previous month. Still, Credit Suisse in December forecast India’s economy will grow 10% this year from 9.5% in 2006, overtaking China as the world’s fastest-growing major economy. It expects China to grow 9.9% in 2007.
Industrial production, which makes up a quarter of India’s economy, is being spurred by the fastest loan growth in more than three decades, rising incomes and savings.
Commercial bank loans to companies have risen at about 30% in each of the past three years, according to central bank data. The pace is the fastest since the Reserve Bank started collating data in 1971.
“The thing of concern is the interest rate, which has been rising,” said Pawan Goenka, president of Mahindra & Mahindra Ltd’s automotive division. “So far growth in the industry has not changed, so far the consumer has been willing to accept the increase in interest rates. But at some point it’s going to become too much.”
Nissan Motor Co., Japan’s third-biggest automaker, Renault SA and Mahindra & Mahindra Ltd, India’s biggest maker of tractors and sport-utility vehicles, said last month they will spend Rs40 billion rupees ($906 million) on a factory in India to meet demand for cars and sport-utility vehicles.
Maruti Udyog Ltd, maker of half the cars purchased in India, sold 30% more vehicles in January, helped by record domestic demand for models including its Swift and Zen Estilo hatchbacks.
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 US 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 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.
“Infrastructure bottlenecks hurts industrial production,” said D. H. Pai Panandiker, president, RPG Foundation, an economic policy group in New Delhi. “Electricity generation, for example, is inadequate and it constraints all companies.”
India produces about 8% less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80% of the goods transported in India, account for only about 2% of the country’s roads. It takes an average 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.