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Industrial growth slows; banks told to look sharp

Industrial growth slows; banks told to look sharp
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First Published: Tue, Feb 12 2008. 11 55 PM IST
Updated: Tue, Feb 12 2008. 11 55 PM IST
New Delhi: Finance minister P. Chidambaram on Tuesday asked the heads of public sector banks to lend more money to finance purchase of consumer durables and homes—an appeal that came on the same day the government released data showing sluggish trends in industrial production in the face of interest rates that are at a six-year high and which have hit the sales of consumer durables, automobiles and homes.
For the nine months to December, the Index of Industrial Production, or IIP, showed an average growth of 9% compared with 12.2% in all of 2006-07, data released by the Central Statistical Organisation showed.
Robust growth in consumption is needed to drive production and investment, Chidambaram said.
Industrial output contributes one-fourth of India’s gross domestic product (GDP). The government said last week that it expected the economy to expand at a lower-than-expected 8.7% in 2007-08, a three-year low compared with 9.6% in 2006-07 and 9.4% in 2005-06, because of slower growth in the manufacturing sector.
The government has also set up a committee under V. Krishnamurthy, chairman of the National Manufacturing Competition Council, to identify the causes for the slowdown and suggest remedies, some of them before the Budget.Industrial production itself showed an unexpected revival in December, rising 7.6% after a 13-month low of 5.1% in November, but a closer reading of the data showed deeper signs of fatigue in factories and plants.
The current revival was in line with expectations and wouldn’t continue, said Rajeev Malik, executive director, JPMorgan Chase, Singapore.
“The cumulative impact of monetary tightening will soften industrial activity in the coming months, offset by continuing strength in private capital expenditure and infrastructure spending,” he added.
Manufacturing industries grew faster by 8.4% compared with 4.9% in November, buoyed by consumer non-durables such as groceries which rose by 10.6% and capital goods which grew by 16.6%, slower than the average of 20% recorded by this sector since April.
Robert Prior-Wandesforde, India economist for HSBC Plc., said the situation seemed to have reversed in capital goods and consumer goods in December, with the former slowing to 16.6% from 24.3%, while durables showed only their second year-on-year rise in the last eight months.
“If the Indian economy is to continue slowing, then from the perspective of the country’s long-term growth prospects, it would better if the consumer bore the brunt rather than investment spending,” Prior-Wandesforde added.
Even a recent survey by industry lobby, the Federation of Indian Chambers of Commerce and Industry, hinted at some softening in the capital goods sector. But Chidambaram told reporters after his meeting with bankers that “there’s a feeling that adequate credit is not flowing to these sectors (consumer durables and real estate). One must ensure there’s adequate growth in consumption”.
James McCormack, head of Asia-Pacific sovereign ratings, Fitch Ratings, Hong Kong, which too forecast a GDP growth of 8.7% in 2007-08, said: “To some extent, the current (and anticipated) slowdown is a result of policy tightening, implying that it is, in fact, desirable.”
Chidambaram said the monetary policy approach, which consciously tried to cool overall credit growth rate, had impacted consumption loans. Banks have been discouraged from lending to more volatile sectors.
McCormack added that the strength of the capital goods sector “bode well for India’s medium-term growth potential, underlining structural support for growth that could, to some extent, offset cyclical weakness.”
Some bank chiefs who met with Chidambaram said interest rates on loans are likely to head south in the near future, with the lead being taken on Monday by the country’s largest bank, State Bank of India, which cut its prime lending rate by 25 basis points to 12.5%.
The system has abundant liquidity, said bankers, who did not want to be identified. This is because, unlike bank credit, growth in bank deposits has been increasing. As on 4 January, year-on-year growth in deposits was 25.2% to Rs6 trillion, compared with 22.9% a year ago.
Although Reserve Bank of India governor Y.V. Reddy did not cut interest rates during the third quarter monetary policy review on 29 January, he had indicated that banks could afford to cut rates.
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First Published: Tue, Feb 12 2008. 11 55 PM IST