India's industrial production growth sags

AP News
Posted: Oct 12, 2010 8:55 AM
India's industrial production growth sags

Growth in India's industrial production sagged to a 15-month low of 5.6 percent in August as capital goods output, known for its extreme volatility, shrank during the month, government figures showed Tuesday.

Manufacturing, which has the greatest weight in India's index of industrial production, grew 5.9 percent in August, down from a revised 16.7 percent in July.

Output of capital goods, which includes everything from heavy machinery to cabling, contracted 2.6 percent in August, after growing a revised 72 percent in July.

The high degree of volatility in capital goods output has led some economists, as well as the central bank, to question the reliability of the data.

Capital goods growth, which hinges on large purchases, is by nature lumpy, but such wild swings complicate forecasting and, some say, suggest that data collection needs to be improved.

"It's difficult to extract a trend out of this volatile component, particularly when it's driving the headline number to sharp swings," said Shubhada M. Rao, chief economist at Yes Bank in Mumbai.

"Last month there were just two or three items which drove growth, like insulated cables and wires, which grew 700 percent," she said. "I think either the weightages need to be re-examined or the data collection needs to improve."

She said she's not concerned that industrial growth came in sharply lower than her expectation of 10.8 percent and doubts the data will have a meaningful impact on the central bank's interest rate policy.

"Momentum remains healthy. Demand is looking fairly robust. Look at consumer durables: it continues to grow smartly at 25 percent plus," she said.

She expects industrial production for the fiscal year to moderate to 8.8 percent from 10.4 percent last year.

Rao said the central bank, which has hiked key interest rates five times since March, will likely raise them by another quarter point at their November meeting.

She said more aggressive tightening would exacerbate huge capital flows that have rushed into India and other emerging markets on slow growth and loose monetary policy in developed nations, particularly the United States.

India's benchmark Sensex index slid 1 percent, to 20,135.54 points.

The government revised upward its July industrial output growth estimate to 15.2 percent from 13.8 percent.