Manufacturing activity picked up pace in February

BANGALORE Fri Mar 1, 2013 12:36pm IST

A worker repairs iron rings used in heavy wheels inside a small scale factory in Kolkata February 12, 2013. REUTERS/Rupak De Chowdhuri/Files

A worker repairs iron rings used in heavy wheels inside a small scale factory in Kolkata February 12, 2013.

Credit: Reuters/Rupak De Chowdhuri/Files

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BANGALORE (Reuters) - Indian factories stepped up production last month as domestic orders poured in at a faster pace than January, but weak global demand dented export growth, a business survey showed on Friday.

The HSBC Markit manufacturing Purchasing Managers' Index (PMI), rose to 54.2 in February, after falling to 53.2 in January.

The PMI index, which gauges business activity in Indian factories but not its utilities, has held above the 50 mark that divides growth from contraction for almost four years.

Still, data released on Thursday showed economic growth eased to 4.5 percent in the three months to December, its lowest in nearly four years, cementing expectations for a decade low rate for the current fiscal year to March.

"Manufacturing activity picked up on the back of stronger growth in domestic orders," said Leif Eskesen, HSBC's chief economist for India.

The new orders index rose to 56.3 last month from 55.9 in January but the export orders index fell for the second straight month.

Asia's third largest economy has been hurt by slowing overseas demand and renewed concerns about the euro zone sovereign debt crisis, fuelled this week by an inconclusive Italian election.

The euro zone, India's largest trading partner, has been ravaged by a three year old sovereign debt crisis that has, on and off, threatened to push the global economy into a new downturn.

In addition, elevated inflation, high fiscal and current-account deficits, and a still-weak rupee will dent hopes for a speedy recovery.

India unveiled a surge in government spending on Thursday despite expectations of an austere budget to shore up its finances, imposing new taxes on the rich and large companies to fund a dash for growth ahead of an election due by next year.

Expectations, fuelled in part by comments from finance ministry officials, were that Finance Minister P. Chidambaram would present an austere budget to parliament to cool the threat of a sovereign rating downgrade to "junk" status.

One of the problems facing India is persistent inflationary pressure.

The PMI survey showed costs of raw materials grew at a steady pace, while prices charged grew at a faster rate during February, making it harder for the central bank to ease policy to spur growth.

"Inflation pressures, however, remain firm, with input cost inflation holding steady and inflation of output prices picking up. The numbers underscore that the room for monetary policy easing is limited, even with progress on fiscal consolidation," Eskesen added.

After it cut its policy interest rate for the first time in nine months in January, the Reserve Bank of India warned any monetary easing would depend on how quickly the high current account deficit and inflation could be reined in.

The RBI cut its repo rate by 25 basis points to 7.75 percent and revised its GDP growth forecast to 5.5 percent from 5.8 percent for the fiscal year ending in March.

(Editing by Simon Cameron-Moore)

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