By Cherian Thomas/ Bloomberg
New Delhi: India’s industrial production in March probably grew at the slowest pace in five months as higher interest rates cooled demand for motorbikes, cars and homes.
Output at factories, utilities and mines gained 10.4% from a year earlier after an 11% increase in February, according to the median forecast of 13 economists in a Bloomberg News survey. The Central Statistical Organisation will release the production numbers in New Delhi on 11 May.
Business confidence in India fell this quarter for the first time in six months as Maruti Udyog Ltd and other companies said sales may slow on higher borrowing costs. The central bank may soon end its 2 1/2 year policy of raising rates to curb inflation in the world’s second-fastest growing major economy, according to nine of 11 analysts in a Bloomberg News survey two weeks ago.
“The tightened monetary conditions designed to contain the inflationary effects of overheating in the economy may have led to the decline in confidence among companies,” said Shashanka Bhide, chief economist at the National Council of Applied Economic Research in New Delhi. “The pace of industrial output will slow.”
The business confidence index developed the NCAER, based on responses from 590 companies, declined to 151.3 in the current quarter ending 30 June in the previous quarter, the research group said on 4 May.
Maruti Udyog, India’s biggest carmaker, is offering cash rebates to attract buyers who are deterred from purchasing because of higher borrowing costs. Car sales rose 2.9% in March from a year earlier, the slowest gain in 13 months, the Society of Indian Automobile Manufacturers said last month.
Commercial banks have increased their lending rates by between 200 basis points and 250 basis points since December. State Bank of India, India’s biggest commercial bank, said on 7 April it will charge its best borrowers 12.75%, the highest since April 1999.
Governor Yaga Venugopal Reddy left the central bank’s key overnight lending rate unchanged on 24 April to support growth as he forecast inflation to slow to 5% this year.
Reddy who raised the benchmark rate six times in the past 16 months to a five-year high, may be relying on the lagged impact of past rate increases to rein in price gains in Asia’s fourth-largest economy, assisted by a strengthening currency and cuts in import taxes.
India’s benchmark wholesale price inflation slowed to 5.77% in the week ended 21 April as higher rates damped demand for manufactured goods and lower import taxes reduced prices of wheat and pulses, the government said on 4 May.
India’s factory production also weakened as exports in March grew at less than half the average pace of the past year as a rising rupee hurt earnings from overseas sales of textiles, steel and other goods.
Exports rose 8.8% to $12.6 billion (Rs51,632 crore) in March compared with a 21% increase in the year ended 31 March, the Ministry of Commerce and Industry said on 1May. Exports account for two-fifths of India’s industrial production.
The rupee, which rose as high as 40.545 on 7 May, the strongest since May 1998 fell 0.2% to 40.9137 against the dollar on 9 May.
The International Monetary Fund expects growth in India’s $854 billion economy to slow to 8.4% in the year ending 31 March from 9.2% in the previous year. China’s economy, the world’s fastest-growing major economy, is forecast to expand 10% this year.
“It seems likely that the economy has now passed its cyclical peak,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. “The slowdown largely reflects the cumulative impact of monetary tightening.”
To support growth, Prime Minister Manmohan Singh’s government plans to increase infrastructure spending by 40% to Rs1.34 trillion ($32.8 billion) this year 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 $2 a day.