Falling exports, weak domestic demand and production are hurdles the government is struggling to come to terms with.
India’s industrial production unexpectedly fell for the first time in 15 years, putting pressure on policy makers to add to interest rate and tax cuts to shield the weakening economy from a global recession.
Output at factories, utilities and mines dropped 0.4 percent in October from a year earlier after a revised 5.45 percent gain in September, the Central Statistical Organisation said in New Delhi. Economists expected an increase of 2.1 percent. India last recorded a decline in output in April 1993.
Waning exports and weaker domestic demand are damping growth in India, where investor confidence has also been shaken by terror attacks in Mumbai last month that killed 163 people. Central bank governor Duvvuri Subbarao said after the assault that the economic slowdown may be deeper than earlier estimated.
“The industrial sector and indeed the economy as a whole has been softening for some time,” said HSBC Group Plc’s Singapore-based Robert Prior-Wandesforde, one of only two of the 24 economists surveyed by Bloomberg News who predicted a contraction in production. “The situation is deteriorating more rapidly now.”
India’s 10-year bonds extended gains, pushing yields to the lowest level in more than four years. The yield on the 8.24 percent note due April 2018 fell 6 basis points to 6.14 percent in Mumbai, from 6.20 percent immediately before the report. Shares declined 1.2 percent.
Global crisis
The worldwide financial crisis is curbing industrial output across Asia as recessions in the US and Europe crimp demand for the region’s products. India’s exports fell for the first time in seven years in October.
China’s industrial production growth is likely to drop to 5 percent in November, the weakest pace since Bloomberg data began in 1999, according to the government. Production in South Korea declined for the first time in 13 months in October.
Tata Motors, India’s biggest truckmaker, in November stopped production at a commercial vehicle factory for the second time in a month, shutting its Jamshedpur plant in eastern India for five days.
India’s central bank on December 6 lowered its benchmark repurchase rate to 6.5 percent from 7.5 percent, the third cut since October. The next day the government announced a $4 billion stimulus package.
The government may announce more fiscal measures to boost demand next week, Trade Minister Kamal Nath said.
‘Slumping growth’
“We doubt the interest rate and tax cuts will be sufficient to quickly reverse slumping growth,” said Sonal Varma, an economist at Nomura International Plc in Mumbai. “Both domestic and export demand have slowed sharply due to the ongoing credit crisis, a global recession, sharp declines in asset prices and falling consumer and business confidence.”
Manufacturing, which accounts for about 80 percent of India’s total output, dropped 1.2 percent in October from 5.6 percent in September and consumer-goods production declined 2.3 percent in October from 7.2 percent in the previous month. Electricity output rose 4.4 percent and mining grew 2.8 percent.
India’s passenger-car sales declined 19 percent last month, the most in more than five years, as tighter lending by banks and a slowing economy hurt demand. Sales fell to 83,059 from 103,031 a year earlier, according to the Society of Indian Automobile Manufacturers.
Foreigners flee
Industrial production rose 4.1 percent in the seven months from April to October from a year earlier, less than half the 9.9 percent pace of the same period in 2007.
Concern over companies cutting production and losing profits has seen the benchmark Bombay Stock Exchange Sensitive Index decline 53 percent this year. Overseas investors have sold $13 billion of Indian shares this year, compared with $17.2 billion of share purchases in 2007.
Weaker production and exports may hurt India’s economic expansion. South Asia’s biggest economy may grow 7.5 percent in the year to March 31 from 9 percent or more annually in the previous three years, according to the central bank. India’s economy expanded 7.6 percent in the three months to September 30 from a year earlier, the slowest pace since 2004.
“The worst is yet to be seen,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “Losing support from external orders, India will unlikely see a rebound in manufacturing output any time soon.”
The author is a Bloomberg News columnists. The opinions expressed are his own
