INDIA’S industrial output picked up pace in August, official data showed on Friday (October 12), growing 2.7 per cent from the same month a year earlier in a better-than-expected but still muted performance.
The once-booming economy has been hit by a combination of high interest rates, Europe’s debt crisis that has slowed exports, and sluggish investment caused by domestic and overseas concerns about policy and corruption.
Manufacturing, mining and electricity sectors grew 2.7 per cent in August after shrinking 0.1 per cent in July.
“The still-weak industrial production momentum confirms industrial activity remains subdued and overall economic momentum muted,’ Jyoti Narasimhan, economist at IHS Global Insight, said.
The International Monetary Fund on Tuesday (October 9) forecast India’s economic growth this calendar year would slow to 4.9 per cent – its lowest level in a decade.
Still, the August industrial output figure for Asia’s third-largest economy far eclipsed market hopes of a 1.1 per cent rise.
“This suggests that growth may have bottomed out, assuming external demand doesn’t worsen and the domestic reform progress is sustained,” said India chief economist for HSBC Leif Eskesen.
The numbers “should be seen as the strongest evidence of economic recovery in India to date”, agreed Credit Suisse economist Robert Prior-Wandesforde.
The Congress-led government of Premier Dr Manmohan Singh is hoping the economy will pick up soon as a result of a recently announced string of reforms that ended years of policy paralysis.
The government has eased foreign investment rules in retail, aviation and broadcasting and announced plans to invite more overseas investment into the insurance and pension sectors – steps welcomed by financial markets.
“These reform steps are all welcome but from an economic standpoint there is not going to be any quick impact on Gross Domestic Product numbers,” Narasimhan told reporters.
“Especially with the very, very weak external climate, growth looks like it will have to be domestically driven,” added the IHS economist, who is looking for full-year growth of 5.1 per cent.
Other analysts expect annual growth up to the low six-per cent range – far below India’s stellar near double-digit expansion in some previous years.
India’s new reformist finance minister P Chidambaram, who took over the portfolio in July, has pledged to restart the nation’s “engine of growth”.
The central bank will examine September price data due on Monday (October 15) to see if inflation, running at a stubbornly elevated 7.55 per cent, shows signs of receding even modestly to allow it to cut interest rates.
Business leaders have been clamouring for rate cuts to boost consumption and investment.
The inflation data will “clearly indicate in what direction the bank will be moving,” said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, adding the August industrial output numbers indicate “some turnaround”.
Most analysts bet the bank, which next meets on October 30, will keep lending rates on hold until inflation shows a decisive downward move. It last cut rates in April after an aggressive 13 rate hiking spree.
“If they do cut rates, it would be more of a pat on the back for the (government’s) reforms,” said Credit Suisse’s Prior-Wandesforde.
