India industrial output up 5.9 pct in November

[January 12, 2012]  MUMBAI, India (AP) -- India's industrial production rebounded in November, government data showed Thursday, providing some relief to Asia's third-largest economy, which has been struggling with slowing growth and high inflation.

Industrial production grew 5.9 percent in November, more than expected, thanks to revived consumer demand, the data showed. Output shrank 4.7 percent in October, less than estimated earlier.

The data gives the Reserve Bank of India, whose streak of aggressive rate hikes has begun to dampen growth, some room to hold interest rates steady as it waits for inflation, which has been above 9 percent for most of the last two years, to ease.

"This was the first time in five months that the IP series showed any improvement at all and we were caught off guard by the magnitude of the rebound," Glenn Levine, senior economist at Moody's Analytics said in an email. "We'll stick with our prediction for 6 percent GDP in 2012 as we believe that the India story remains basically unchanged -- a good production number can't reverse the current investor angst or policy stasis, for example."

The government has struggled to kick-start stalled investment and neutralize toxic investor sentiment without damaging its populist credentials before important state elections. That is a tough balancing act for a country that relies on foreign capital to finance its current account deficit -- which has doubled to $55 billion over the last few years, according to Citigroup -- but where the government says three in five children are stunted from malnutrition.

Economists caution that industrial production numbers are choppy and say the Reserve Bank is unlikely to reverse months of rate hikes when it meets Jan. 24 unless it gets strong evidence that inflation is cooling.

"Strong action on the part of the Reserve Bank of reversing the policy will be called for only if inflation shows very strong signs of decline," C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told CNBC-TV18 Thursday.

Mining output was down 4.4 percent in November, in the wake of corruption scandals that have led to massive mine closures. Manufacturing grew 6.6 percent and electricity output was up 14.6 percent, the government said.

Production of capital goods like factories, machinery and tools -- a sign of investment -- shrank 4.6 percent, but consumer goods output grew 13.1 percent.

Analysts say investment in new projects has slowed, particularly in infrastructure. Non-performing loans, many them to infrastructure and real estate companies, are on the rise, central bank data shows.

Rangarajan said the decline in new projects was a "worry" for overall growth going forward. He said the government's efforts to boost spending by public sector companies -- which still dominate large areas of the Indian economy -- could help lift overall growth.

"We have set targets for capacity creation in the areas of power, roads and ports. If we fulfill these targets for capacity creation in these sectors that can act for a stimulus," he said.

But infrastructure projects like that have been hard hit by bureaucratic delays and interest rate hikes, analysts say.

Most are financed with floating rate loans from banks, which means that interest rate hikes directly impact their cost of capital, said S. Nandakumar, a senior director in Fitch Ratings' infrastructure and project finance group.

"If you've done your modeling at 8 percent and provided for 150 basis points of stress suddenly you're faced with a situation where interest rates are up 500 basis points. You have enormous pressure on your cash flows to meet that debt service," he said.

India's prime minister, Manmohan Singh, said this week that India's economy is likely to grow 7 percent for the year ending March, significantly below last fiscal year's 8.5 percent growth.

[Associated Press; By ERIKA KINETZ]

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