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Indian industrial output in shock contraction
Agence France Presse - August 9, 2012
Manufacturing output, which accounts for three-quarters of the Index of Industrial Production, was chiefly to blame, falling 3.2 percent from a year earlier in June, according to government figures.
The industrial output fall defied market forecasts of growth of close to one percent and came as the country faces the spectre of its third drought in a decade that would further reduce growth.
"This was another shocking industrial production release from India... and will inevitably heap more pressure on the central bank to re-start its rate cutting," said Credit Suisse economist Robert Prior-Wandesforde.
India's once-booming economy grew just 5.3 percent between January and March – its slowest annual quarterly expansion in nearly a decade. The next quarterly growth figures are due at the end of the month but "the omens are not particularly encouraging," said Prior-Wandesforde.
The June shrinkage in output by factories, mines and utilities was the third contraction in four months and followed a revised 2.5 percent production rise in May. Capital goods output, a vital investment signal, slid 27.9 percent in June – the largest contraction on record according to Credit Suisse.
Manufacturing in Asia's third-largest economy has been undermined by high interest rates to combat stubbornly high inflation of over seven percent, and Europe's debt crisis which has hit exports.
Unlike other central banks which have been cutting rates to spur growth, the Reserve Bank of India (RBI) has been holding back on reducing borrowing costs, saying it wants inflation to ease first.
"The situation calls for urgent policy measures both by the RBI as well as the government to salvage industry from further decline," said Chandrajit Banerjee, director general of the Confederation of Indian Industry business group.
Indian shares slipped slightly on the release of the data, then steadied on investor hopes that it might spur future rate cuts.
Chidambaram, named finance minister last week, has pledged to restart India's "growth engine" and has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".
But analysts have been sceptical about how much he can achieve with the left-leaning Congress government under pressure after a string of graft scandals and parliamentary gridlock over its attempts to liberalise the inward-looking economy.
Economists have already been taking a knife to their growth projections for the fiscal year to March 2013 with Goldman Sachs economist Tushar Poddar expecting 5.7 percent in contrast to the central bank's forecast of 6.5 percent.
Glenn Levine, senior economist at Moody's Analytics, said on Thursday he believed growth would be closer to 5.5 percent.
Citibank has said if a nationwide drought is declared – which would be the country's third in a decade – expansion could be as low as 4.9 percent
Farming's contribution to gross domestic product has fallen from 50 percent in the 1950s to some 15 percent but remains key by supporting 700 million rural Indians and fuelling demand for everything from TVs to motorcycles and gold. Already around a dozen of India's 29 states have declared themselves "drought-affected".
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