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Factory output slows to 6.3%, new index starts

business Updated: Jun 10, 2011 21:12 IST
HT Correspondent

India's factory output growth in April rose 6.3 %, less than half from last year's 13.1%, latest data showed on Friday, mirroring signs of an imminent industrial slowdown as rising input costs and costlier borrowing squeeze corporate profitability, forcing them to defer planned investments.

The latest data was the first of new series of index of industrial production (IIP) that includes production trends in 150-odd new items, including ice cream, fruit juices and mobile phones with a base year of 2004-05.

Obsolete articles such as typewriters, loud speakers and VCRs have been taken off to make the series more representative of contemporary Indian economy. Under the old series, annual industrial output growth in April was 4.4% and experts said higher growth in the new series does not imply an arrest in the slowdown.

"While the market has two sets of data points to look at, there is no change in the industrial (growth) slowdown story" said Anubhuti Sahay, economist at Standard Chartered Bank.

The new items in the revised IIP also include computer stationary, newspapers, chemicals, power systems, gems and jewellery and molasses. The new series include 682 items, up from the current 543 items.

The manufacturing sector, which accounts for 80% of India's industrial output, grew at 6.9% during April.

A slower manufacturing sector growth will hurt corporate profitability and employment prospects in factories.

It will also affect the government's tax revenue collections and finance minister Pranab Mukherjee said earlier this week that meeting the budgeted tax revenue targets will be a "challenge."

On Friday, Mukherjee termed the latest IIP growth as disturbing. "The IIP growth figures are disturbing. (We) need to wait for longer term IIP growth to see the trend," Mukherjee said.

Economists, however, do not expect the Reserve Bank of India to press the pause button on interest rate hikes to cool prices that have remained sticky.

The central bank has raised repo rates by nine times in the last 13 months to cool prices and is expected to raise rates further in its mid-quarter review on June 16.

"We expect the Reserve Bank of India to hike rates by 0.25 percentage points next week," said Sahay.

India's gross domestic product (GDP) grew 7.8% during January to March slowest pace in five quarters.

"RBI has to be a cautious given the global demand outlook, though commodity price inflation is still high. We are expecting RBI to hike rates by 0.25 percentage points next week," said Sonal Varma, economist at broking and research firm Nomura.