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BW Businessworld

Dec Industrial Growth Drops

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Indian industrial production (IIP) likely grew at a weaker annual rate of 3.4 per cent in December, down from November's 5.9 per cent, on slowing infrastructure output and domestic demand, according to a Reuters poll.

Forecasts from a poll of 26 economists on the volatile index taken this week ranged from a fall of 4.3 per cent to an increase of 5.1 per cent, although all but one forecast was for the index to rise.

Factory output grew at 2.5 per cent in December 2010, revised government data showed.

Arun Singh, senior economist at Dun & Bradstreet, said the slower growth rate would reflect "moderation in demand because of high interest rates and subdued overall economic activity."

Infrastructure sector output, which accounts for more than a third of total industrial output, rose at an annual rate of 3.1 per cent in December, sharply lower than the revised annual growth of 6.7 per cent in the previous month.

The expected slowdown would challenge findings from the India PMI, which showed the biggest monthly rise since 2009 in December, to 54.2 from 51.0, where a number above 50 denotes growth. It rose further in January to 57.5, an eight-month high.

A high statistical base could also lead to subdued industrial output growth, said some analysts, including Rupa Rege Nitsure at Bank of Baroda, who expects a 4.3 per cent decline, the only analyst polled looking for a fall.

Indian industry has been hurt by rising input costs and slowing demand, partly as a result of 13 interest rate hikes between March 2010 to last October to curb inflation.

The Reserve Bank of India cut the cash reserve requirement for banks by 50 basis points last month, signalling a shift in policy towards reviving growth, but left the repo rate unchanged at 8.5 per cent on stubbornly high inflation.

Factors To Watch

  • The HSBC Manufacturing Purchasing Managers' Index (PMI) jumped to an eight-month high of 57.5 in January, up from 54.2 in December, as increased domestic and foreign demand pushed factory output to record its biggest one-month increase on record.

  • Factory output and new orders jumped in December, suggesting the factory sector might be in for better times, components of an earlier PMI showed.

  • India's December exports rose an annual 6.7 per cent to Rs 122,500 crore, while imports rose 19.8 per cent to Rs 185,220 crore, the government said last week.

  • Subir Gokarn, a deputy governor of the RBI, said there is no room for aggressive interest rate cuts in India and any future cuts would depend on macroeconomic factors.