Factory output slides sharply as exports fall

NEW DELHI Tue May 12, 2009 7:39pm IST

Railway wheels are removed from coaches for repair work at a railway yard in Mumbai May 5, 2009.  Industrial output fell at its steepest annual pace in at least 14 years in March, leaving the door open for further interest rate cuts by the Reserve Bank, but analysts said the economy was still set for recovery from late 2009. REUTERS/Punit Paranjpe

Railway wheels are removed from coaches for repair work at a railway yard in Mumbai May 5, 2009. Industrial output fell at its steepest annual pace in at least 14 years in March, leaving the door open for further interest rate cuts by the Reserve Bank, but analysts said the economy was still set for recovery from late 2009.

Credit: Reuters/Punit Paranjpe

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NEW DELHI (Reuters) - India's industrial output fell at its steepest annual pace in at least 14 years in March, leaving the door open for further interest rate cuts by the Reserve Bank, but analysts said the economy was still set for recovery from late 2009.

India's factory output in March fell 2.3 percent from a year earlier, the third fall in the past four months and much sharper than market expectations of a 0.5 percent fall.

It was the steepest fall since annual numbers in the current series became available in April 1995.

"We were expecting this kind of number given the collapse in external demand and the weak PMI data," said Robert Prior-Wandesforde, Senior Asian Economist at HSBC in Singapore.

"But we still believe the economy is set for a rebound in the second half of the 2009/10 fiscal year due to fundamental reasons such as fiscal stimulus packages, monetary actions, extra oil and gas output later this year and falling commodity prices and robust domestic demand."

For a graphic on factory output trends, click here

Tuesday's dismal data followed figures showing a sharper-than-expected drop in China's exports in April which dampened optimism that a global economic recovery might be around the corner.

Talk of a recovery in Asia's third-largest economy has picked up as some figures, including car and cement sales, showed some signs of a rebound. But the factory data showed demand was still sluggish, and manufacturing fell an annual 3.3 percent.

Analysts said a full-blown recovery was only possible after a pick-up in exports, which fell an annual 33.3 percent in March. But that won't happen without a sharp recovery in consumer spending in key markets such as Europe and the United States.

Still, Indian factory output is primarily geared for domestic demand, unlike many Asian economies which depend heavily on exports, and that is where analysts saw reason to be upbeat.

"...we are heartened to see consumer durables continue its upward growth trajectory as we feel this will be the driver of economic recovery in a domestic consumption-led economy like India," said Atsi Sheth, chief economist at Reliance Equities.

Bond yields eased slightly after the data and in afternoon trade the 10-year benchmark bond yield was at 6.34 percent, down three points from before the data.

MORE RATE CUTS?

Industrial output, which accounts for a quarter of GDP, grew a paltry 2.4 percent in 2008/09 (April-March), slowing sharply from 8.5 percent growth in 2007/08, Tuesday's data showed.

The government estimates economic growth slowed to a six-year low of 6.5 percent in 2008/09, after growing at or above 9 percent in the previous three fiscal years. The central bank expects the growth rate to slow further to 6 percent in 2009/10.

Factory output slowed sharply last year as high borrowing costs and the global credit crunch forced firms first to delay expansion plans, and then cut output as demand for goods in overseas markets fell sharply as the global economy turned down.

Some analysts said the data could see the central bank cut rates further to boost growth. It has already cut its key lending rate by 425 basis points since October, most recently in April.

As well, a new government is expected to take office by the end of the month after election votes are counted this weekend, and its priority would be to protect growth and jobs, which should also support activity and demand.

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