India Industrial Output January 2008

India's industrial production growth slowed in January as interest rates near a six-year high curbed demand for cars and other consumer goods. Production at factories, utilities and mines rose 5.3 percent from January 2007 after gaining a revised 7.7 percent in December, according to data from the statistics office in New Delhi.




Today's report also showed that industrial production grew 8.7 percent in the ten months ended Jan. 31, slower than 11.2 percent in the same period twelve months earlier.

Finance Minister Palaniappan Chidambaram in his Feb. 29 budget cut duties and reduced the tax burden on individuals to spur consumption after nine rate increases by the Reserve Bank of India in the last three years curbed demand. The central bank last week said it faces policy ``dilemmas'' as economic growth slows and inflation accelerates.

Bank governor Reddy has raised the central bank's benchmark rate nine times since October 2004 and ordered commercial lenders to set aside more money five times since December 2006 to prevent excess cash in the economy from stoking inflation, currently at a nine-month high of 5.02 percent. He also reiterated last week that tackling inflation is a higher priority than boosting growth.

Higher rates have forced ICICI Bank - India's biggest by market value - and its peers to raise their lending rates, reducing demand for motor vehicles, homes and washing machines.

Passenger vehicle sales rose 13 percent to 1.26 million units between April and January, slower than the 21 percent pace for the year ended March 31. Production of two-wheeled bikes at Bajaj and TVS declined 3.6 percent in January.



Chidambaram in his budget cut the excise on small cars, buses, motorcycles and scooters to 12 percent from 16 percent and raised the income tax exemption limit to 150,000 rupees ($3,700) from 110,000 rupees to spur consumption.

Manufacturing, which accounts for about 80 percent of India's industrial production, gained 5.9 percent in January from a year ago, according to today's report. Consumer-goods output jumped 7 percent, mining grew 1.8 percent and electricity increased 3.3 percent.

Consumer durables production, including washing machines and television sets, fell 3.1 percent in January after increasing 5.3 percent a year earlier. Output of capital goods rose 2.1 percent compared with 16.3 percent a year ago.

The slowdown in capital goods output growth, a lead indicator of investor activity, is worrying since investment has been the main driver of strong economic growth in recent years.

Higher interest rates have also curbed loans growth. Lending rose 21.8 percent in the 12 months to Feb. 15, less than the 29.6 percent expansion a year earlier.


Chidambaram last week said there is a need to reduce loan rates for homes and consumer durables as they are the key drivers of the economy, and he has been urging commercial banks to lower lending rates to revive slowing loan growth and help boost investment as consumer goods sales begin to decline.

India needs faster industrial production to lift economic growth, which is expected to be 8.7 percent in the year to March 31, the slowest in the last three years. Still, growth will have averaged 9.2 percent since 2005, the quickest pace since India's independence in 1947 and behind only China among the world's major economies.