New Delhi: India’s industrial production growth accelerated to a five-month high in July, before higher interest rates had a chance to damp consumer spending.

Output at factories, utilities and mines rose 7.1% from a year earlier after a 5.4% gain in June, the Central Statistical Organisation said in New Delhi on Friday. Economists expected an increase of 6%.

Production may slow after the Reserve Bank of India (RBI) raised borrowing costs three times in as many months to tackle the fastest inflation in 16 years. Tractor maker Mahindra and Mahindra Ltd and Maruti Suzuki India Ltd, which makes half the cars sold in India, are already reporting weaker sales, and the nation’s output growth in 2008 has averaged half last year’s pace.

“The increase in interest rates has severely impacted industrial activity," said Sajjan Jindal, managing director of JSW Steel Ltd, India’s third largest steel maker. Companies are deferring expansion plans as they incur losses due to rising input costs, he said.

Faster inflation, fuelled by surging energy and commodity prices, is damping consumer demand and cutting industrial production across Asia.

China’s production grew 12.8% in August from a year earlier, the slowest pace in six years. Singapore’s factory output in July fell the most in two years.

India’s central bank on 29 July increased its benchmark interest rate by half a point to a seven-year high of 9% after raising it twice in June. Governor D. Subbarao, who took over the top job at RBI last week, is grappling with inflation running at 12.1%.

Manufacturing gained 7.5% in July from 6.1% in June, Friday’s report showed. Electricity output rose 4.5% in July from 2.6%, mining grew 5% and consumer goods production increased 7.3%. Capital goods production rose 21.9% in the month, compared with 12.3% in June.

Countering inflation: Prime Minister Manmohan Singh has urged companies in all sectors to raise output to ensure growth. B Mathur / Mint

“The trend going forward for production growth will remain subdued due to higher interest rates and accelerating inflation," said Kaushik Das, an economist at Mumbai-based Kotak Mahindra Bank Ltd.

Prime Minister Manmohan Singh last week urged companies to raise output to counter inflation. “To ensure non-inflationary growth, we must step up production in all sectors," Singh said.

Higher interest rates have begun to discourage spending by consumers who rely on loans to buy cars and motorcycles. Passenger car sales in India fell 4.4% in August from a year earlier after declining 1.7% in July, the Society of Indian Automobile Manufacturers said on Thursday.

Weaker industrial production may deepen India’s economic slowdown. The economy is forecast by RBI to grow 8% in fiscal 2009, the slowest pace of expansion in four years.

Still, industrial production may get a boost in the coming months as Singh announced an average 21% wage increase for about 5 million government workers in August.

Indians are expected to receive an average 14.8% pay rise this year, the highest in the Asia-Pacific region, according to human resources firm Hewitt Associates. That compares with an average salary increase of 15.1% in 2007.

That may limit the damage that higher borrowing costs and runaway inflation will have on consumer spending, said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd, the local unit of Standard and Poor’s.

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