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Dismal trade, IIP deepen India’s economy fears

REUTERS

NEW DELHI

INDIA’S economic gloom deepened on Monday with a surprise contraction in industrial production, a fall in exports and higher retail inflation, dashing hopes of a quick revival in an economy on track to post its slowest growth in a decade.

The data will add pressure on the government to boost economic growth by fasttracking stalled tax and regulatory reforms. It will also bolster calls for an interest rate cut by the country’s central bank, which has so far ruled out any before January, citing high inflation.

Two of the country’s biggest business chambers expressed alarm at the data, which caused the rupee to fall to a two-month low. They said it was clear that the slowdown in manufacturing growth had not yet bottomed out.

“At this juncture, it is important that government does not lose momentum on the reform front and needs to take courage now to implement some big ticket reforms,” said R V Kanoria, president of the Federation of Indian Chambers of Commerce and Industry.

The data underscored the scale of the challenges facing Prime Minister Manmohan Singh in trying to revive an economy that once boasted double-digit growth but has been hard hit by the global economic downturn and a series of policy missteps.

Credit Suisse said India’s October trade deficit of nearly $21 billion was the country’s worst on record and could prompt the government to impose measures to curb the deficit, such as further increases in import duties on gold.

Industrial production unexpectedly shrank an annual 0.4 percent in September, according to the Central Statistics Office (CSO). That came as a nasty surprise to economists who had forecast a rise of 2.8 percent in a Reuters poll.

Analysts had hoped India’s festival season, which began in September and will peak this month, would boost sales.

Production of consumer goods fell 0.3 percent in September from a year earlier.

Capital goods, a proxy for capital investment in the economy, shrank an annual 12.2 percent.

“Investment plans have slowed down. It takes a long time for investment plans to pick up again,” said Montek Singh Ahluwalia, deputy chairman of India’s influential Planning Commission.

Finance Minister P Chidambaram told Reuters earlier this month that growth for this financial year could be as low as 5.5 percent, which would be the slowest rate of expansion since 2002/03.

Delays in environmental and other regulatory clearances, coupled with high interest rates, have hurt many industrial and infrastructure development projects.

The government has launched a slew of initiatives, including raising subsidised diesel prices and opening sectors like supermarkets to foreign players to revive the economy.

But Indian business leaders said it needed to swiftly take more steps, including speeding up approval of infrastructure projects, overhauling the tax system and, reducing its huge fuel, food and fertiliser subsidies burden.

Business leaders also called on the central bank to reduce interest rates that are the highest among the major economies.

Chidambaram has been arguing for lower rates, saying monetary policy has limitations in controlling inflation in an emerging economy such as India and that policymakers must learn to live with some inflation.

The next monetary policy review is due in December.

The central bank has said any interest rate cut is “highly improbable” at that meeting, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September.

Reinforcing the central bank’s expectations on inflation, the consumer price index rose an annual 9.75 percent in October, a little faster than 9.73 percent rise a month ago, government data showed on Monday.

October wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due to be released on Wednesday.

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