India’s Industrial Production Jumps 5.9%, Beating Expectations

bhopal india

[credit provider=”ap”]

MUMBAI, India (AP) — India’s industrial production rebounded in November, government data showed Thursday, providing some relief to Asia’s third-largest economy, which has been struggling with slowing growth and investment coupled with high inflation.Industrial production grew 5.9 per cent in November, more than expected, thanks to revived consumer demand, the data showed. Output shrank 4.7 per cent in October, less than estimated earlier.

The data gives the Reserve Bank of India, whose streak of aggressive rate hikes has begun to dampen growth, some room to hold interest rates steady as it waits for inflation, which has been above 9 per cent for most of the last two years, to ease.

Economists caution that industrial production numbers are choppy and say the Reserve Bank is unlikely to reverse months of rate hikes when it meets Jan. 24 unless it gets strong evidence that inflation is cooling.

“Strong action on the part of the Reserve Bank of reversing the policy will be called for only if inflation shows very strong signs of decline,” C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told CNBC-TV18 Thursday.

November’s rebound was powered by a 13.1 per cent upswing in consumer goods production, which Atul Joshi, chief executive of Fitch Ratings in India, attributed to increased demand during India’s holiday season.

“The near term industrial growth outlook does not seem very bright,” he said. Output of intermediate goods — things like car engines and plywood, which are used to make other items and serve as a leading indictor of industrial production — grew just 0.2 per cent in November.

Production of capital goods like factories, machines and tools — which are an indictor of investment — contracted 4.6 per cent, which Joshi called a “not so encouraging” sign.

Mining output was down 4.4 per cent in November, in the wake of corruption scandals that have led to massive mine closures. Manufacturing grew 6.6 per cent and electricity output was up 14.6 per cent, the government said.

The government has struggled to kick-start stalled investment and neutralize toxic investor sentiment without damaging its populist credentials before important state elections. That is a tough balancing act for a country that relies on foreign capital to finance its current account deficit — which has doubled to $55 billion over the last few years, according to Citigroup — but where the government says three in five children are stunted from malnutrition.

Analysts say investment in new projects has slowed, particularly in infrastructure. Non-performing loans, many them to infrastructure and real estate companies, are on the rise, central bank data shows.

Rangarajan said the decline in new projects was a “worry” for overall growth going forward. He said the government’s efforts to boost spending by public sector companies — which still dominate large areas of the Indian economy — could help lift overall growth.

“We have set targets for capacity creation in the areas of power, roads and ports. If we fulfil these targets for capacity creation in these sectors that can act for a stimulus,” he said.

But infrastructure projects like that have been hard hit by bureaucratic delays and interest rate hikes, analysts say.

Most are financed with floating rate loans from banks, which means that interest rate hikes directly impact their cost of capital, said S. Nandakumar, a senior director in Fitch Ratings’ infrastructure and project finance group.

“If you’ve done your modelling at 8 per cent and provided for 150 basis points of stress suddenly you’re faced with a situation where interest rates are up 500 basis points. You have enormous pressure on your cash flows to meet that debt service,” he said.

India’s prime minister, Manmohan Singh, said this week that India’s economy is likely to grow 7 per cent for the year ending March, significantly below last fiscal year’s 8.5 per cent growth.