India surprises with rise in June industrial output

India’s industrial output grew 8.8% in June from a year earlier, data showed on Friday, displaying unexpected resilience in the face of an aggressive string of interest rate hikes.

The expansion in production by factories, mines and utilities was the fastest in three months—topping analysts’ forecasts of 5.5% growth—and marked a sharp upturn from May when output grew by 5.9%.

But economists warned the data could be a “blip”, noting the figures were at variance with others suggesting Asia’s third-largest economy is weakening.

Also, while the strong headline number was seen giving the central bank room to pursue its anti-inflation fight and hike interest rates again at its next meeting in September, mounting fears about the global economy raised chances it would hold its fire, economists said.

“Bottom line, a wait-and-see [stance] by the Reserve Bank cannot be ruled out,” said CLSA economist Rajeev Mailik.

“Global developments over the next month will have an important bearing” on the bank’s decision, agreed HSBC’s chief India economist Leif Eskesen.

Encouraging growth
Analysts expect global financial concerns to prompt monetary authorities worldwide to take an extended pause on the rate front.

But India remains a wild card due to its stubbornly high inflation—the most elevated among major Asian economies—which has heaped hardship on the hundreds of millions of poor who are key supporters of the Congress-led government.

India’s central bank has hiked lending rates 11 times since March 2010 in a vain bid to bringing down inflation running at 9.44% that has been fed by surging food and fuel prices.

But business now is pressing the bank to stop its monetary tightening, fearing it will tip the economy into a downward spiral.

The government saw the data as showing the economy was maintaining momentum.

“It’s encouraging,” said Finance Minister Pranab Mukherjee, who declared last weekend he was sticking by his forecast that economic growth would match last year’s 8.5% despite the global financial turmoil.

“If this trend continues, it will give a boost to growth,” he said.

No interest rate increases
Manufacturing output was up 10% year-on-year while production of capital goods such as factory equipment soared 37.7%.

But economists pointed out that a break-up of the figures showed output of consumer durables such as refrigerators and stoves—a key demand barometer—rose by just 1% in June, the slowest pace in nearly two years.

“Further moderation in industrial activity remains in store,” said CLSA economist Malik.

Many economists have already trimmed their growth expectations for this fiscal year to March 2012 to the 7% to 8% range, citing the dampening effects of the longest stretch of monetary tightening in a decade.

While 7% to 8% growth is enviable by Western standards, experts say India needs at least 10% expansion to end widespread chronic poverty.

Goldman Sachs economist Tushar Poddar said he believed that despite its hawkish tone, the central bank was done with hiking its benchmark lending rate which stands at a nearly three-year high of 8%.

“The recent volatility in global markets increases the probability the central bank will not increase rates any further,” Poddar said, adding the bank could start cutting rates next year.—AFP

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