India's production accelerates: Survey

By SiliconIndia   |   Wednesday, 11 April 2007, 07:00 Hrs
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New Delhi: India's industrial production growth has accelerated in February this year, vindicating the central bank's unexpected interest rate increase a fortnight ago to damp consumer demand and curb inflation.

Production at factories, utilities and mines rose 11.2 percent from a year earlier, following January's 10.9 percent gain, according to the median forecast of 12 economists in a Bloomberg survey.

The Reserve Bank of India, which has increased its lending rate to a five-year high, may refrain from raising borrowing costs in its scheduled 24th April monetary policy announcement. The central bank had raised its key overnight lending rate and banks reserve requirement as unprecedented demand for manufactured goods kept inflation above its target for 16 straight weeks.

"The Reserve Bank may prefer to wait and see the impact of recent monetary policy actions on consumer demand and inflation," said D. H. Pai Panandiker, President of RPG Foundation, an economic policy group based in the capital. "Interest rate increases in the past four months have been quite aggressive," he added.

The Reserve Bank also raised the cash reserve ratio, or the amount of cash lenders must set aside against deposits, for the third time since December and increased the benchmark overnight lending rate for the sixth time in 15 months.

Commercial banks have increased their lending rates by between 200 basis points and 250 basis points in the past four months. ICICI Bank Ltd., India's biggest by market value, on 31 March increased its prime-lending rate for the fourth time since December. A basis point is 0.01 percentage point.

Climbing rates will slow India's $854 billion economy to an 8 percent growth in the year ending 31 March, the Asian Development Bank and Goldman Sachs Group had said last week. HSBC Holdings Plc expects a 7.8 percent expansion. India's economy grew 9.2 percent in the previous year, the government estimates. Industrial output makes up a quarter of the economy, reported a business daily.

Companies including Ashok Leyland Ltd., India's second- biggest maker of trucks and buses, have said rising rates will hurt demand for commercial vehicle manufacturers. Bajaj Auto Ltd., India's second-biggest motorcycle maker, said sales declined 9 percent in March.

Finance Minister P. Chidambaram, who wants to sustain faster economic growth, said that the government supports Reddy's actions to contain inflation. Chidambaram's Congress party blamed inflation for state election losses in February. The party currently faces polls in the northern state of Uttar Pradesh.

Rising salaries are also aiding the demand. Workers in India this year can expect a 7 percent increase in annual real salary, after adjusting for inflation, the biggest rise among the 45 countries including U.S. and Japan surveyed by human resources consultant ECA International.

Industries such as steel and cement are also benefiting from Prime Minister Manmohan Singh's decision to increase infrastructure spending by 40 percent to Rs 1.34 trillion ($30.2 billion) in the year starting 1st April in a bid to attract more overseas manufacturing companies.

Singh’s government is also seeking investments of $320 billion by 2012 to improve roads, airports and other infrastructure to attract foreign companies, create jobs and sustain growth of over 9 percent in the next decade to eradicate poverty. The World Bank estimates more than half of India’s 1.1 billion people still live on less than $1 a day.

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