Economy | Sat Jan 12, 2013 5:23am IST

Industrial output contracts, supports case for rate cut

NEW DELHI (Reuters) - India's industrial output unexpectedly shrank in November, and while the data was badly distorted by the Diwali holiday it was still seen backing the case for an interest rate cut to boost an economy that appears set to post its slowest growth in a decade.

The index of industrial production fell 0.1 percent annually in November, data released by the Central Statistics Office showed on Friday, compared with revised growth of 8.3 percent in October. Output has grown in just three of the last eight months.

The outturn was even worse than the 0.7 percent growth a Reuters' poll of analysts had predicted for November.

Output was depressed by the Diwali holiday, which was in November last year, whereas in 2011 it fell in October. Diwali is one the biggest Hindu festivals in India, with many factories shutting for several days.

"The correction in the November headline (industrial production) was largely priced in on passage of festive demand and manufacturers' possibly drawing down on inventories rather than stepping up production towards end-2012," said Radhika Rao, economist at Forecast Pte, Singapore.

Still, Friday's data underscores the challenge Prime Minister Manmohan Singh faces turning the wheel on the economy.

GDP growth that once looked set to hit double-digits has been stuck below 6 percent for the past three quarters. The slowdown is worrying for the government as it prepares for a series of state elections and a general election due in 2014.

SIGNS OF RECOVERY IN EXPORTS

The government, however, could take some heart from the trade data for December, which showed the pace of contraction was slowing down in the exports sector, which accounts for one-fifth of India's gross domestic product.

"All (export) sectors have slightly improved, except textiles," Trade Secretary S.R. Rao told reporters.

Merchandise exports fell to $24.88 billion in December, down 1.9 percent from a year earlier. Imports, however, rose 6.3 percent to $42.5 billion.

The trade deficit narrowed to $17.7 billion in December from $19.3 billion in November. That brought the deficit for the first nine months of the fiscal year to $147.2 billion, widening from $137.3 billion at the same point in the previous year.

India's current account deficit hit an all time high of 5.4 percent of gross domestic product in the July-September quarter on a widening trade gap, putting the rupee under pressure.

The rupee was the third worst performer in Asia in 2012, losing 3.5 percent against the dollar for a second straight yearly loss, even though net portfolio inflows into Indian stocks were the highest in the region.

This reliance on volatile foreign capital inflows to bridge the gap is regarded as a serious faultline in the economy, haunted by memories of the 1991 balance of payment crisis when the central bank sent 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.

Having been pilloried earlier for inaction as economic growth slumped, Prime Minister Manmohan Singh has launched a slew of bold measures since late last year that included cutting fuel subsidies, hiking rail passenger fares and opening the retail sectors to foreign players.

Still, investments are showing little signs of an upturn. Capital goods production, seen as a guide to investment levels, has grown just once in the last eight months. In November, it shrank an annual 7.7 percent.

"The contraction in capital goods after a brief reprieve last month reiterates that investment cycle is yet to pick up in a meaningful manner," Shubhada Rao, Chief Economist at Yes Bank, in Mumbai.

RATE CUT IN OFFING?

Politicians and business folk have been calling for the central bank to slash interest rates that are among the highest of the major economies.

The Reserve Bank of India (RBI) has left its policy repo rate unchanged at 8.0 percent since April 2011, citing stubbornly high inflation, but after signalling it could cut in the January-March quarter eyes are now on an upcoming policy review on January 29.

Inflation numbers for both wholesale and retail prices are due to be released on Monday and could provide crucial pointer.

According to a Reuters poll of analysts, wholesale prices probably rose an annual 7.40 percent in December, faster than a 7.24 percent rise in the previous month.

Consumer price inflation in the same month probably stood at 10.20 percent, above 9.90 percent in November, the same poll showed on Thursday.

Several analysts believe the RBI should still have leeway to cut its policy rate if the uptick in inflation in December is not more severe.

"We are of the view that the Reserve Bank of India will definitely cut rates by 25 basis points, maintain a dovish tone, and a commitment to maintain liquidity in the comfort zone through open market operations," said Rao of Yes Bank.

(Additional reporting by Matthias Williams and Arup Roychoudhury in NEW DELHI, Treasury, markets team in MUMBAI; Editing by Simon Cameron-Moore)

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