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India industrial production falls 5 percent in Oct

By Erika Kinetz
AP Business Writer / December 12, 2011
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MUMBAI, India—India's industrial production slid 5.1 percent in October, helping drive the rupee to a fresh record low against the dollar -- more signs of the reversal of fortunes in Asia's third-largest economy.

The decline in output from a year earlier was driven by mining and manufacturing, as well as waning consumer demand and lackluster investment, according to government figures released Monday.

Industrial output hasn't fallen in India since June 2009.

Despite global headwinds, many economists say India's troubles are largely homegrown, as the effects of 13 consecutive interest rate hikes begin to ripple through the economy. Political paralysis has also made it difficult to kickstart growth and investment in the face of a plunging rupee and two years of near double-digit inflation.

The disappointing data punished the rupee, which touched 52.86 to the dollar Monday, breaching its late November low. This is the weakest the rupee has been since it was allowed to float against the dollar in the early 1990s. The benchmark Sensex index closed down 2.1 percent at 15,870.

"This slowdown is clearly continuing and it may be intensifying," HSBC chief economist for India, Leif Eskesen, said from Singapore. "What's driving it is the lagged effect of monetary tightening and the high level of inflation that are causing uncertainty about the macroeconomic outlook. That hurts incentives to invest and spend."

He said policy paralysis was also contributing to India's woes.

With little scope for stimulus spending, India needs to enact difficult but crucial reforms to kickstart the economy and reassure investors, who are jittery from the dark global economic outlook, economists and businesspeople say.

The government's humiliating U-turn on its decision to allow greater foreign investment in retail, however, suggests that the ruling Congress Party -- fractured by internal divisions and facing a revolt by opposition parties and coalition allies -- no longer has the leverage to push its reformist agenda.

Parliament has yet to address a slew of issues, which could help spur investment and kickstart growth, which slipped to 6.9 percent in the September quarter, the lowest in over two years.

On the table are a land acquisition bill, which advocates say would ease contentious land transfer policies and speed investment, as well as tax reform, new mining regulations and measures to allow greater foreign investment in defense and aviation.

Chandrajit Banerjee, director general of the Confederation of Indian Industry, a business group, called the lower factory production a "serious disappointment."

"If allowed to continue, this would have serious consequences on employment and livelihoods," he said. Urgent measures are needed to encourage investment, he said.

Last October, industrial production grew by over 11 percent.

The fall was much sharper than expected and puts pressure on the central bank to arrest or start reversing a series of interest rate hikes when it meets this week.

A CNBC-TV18 poll of economists had forecast industrial production to contract 1.6 percent.

Mining activity shrank by 7.2 percent in October, constrained by bureaucratic bottlenecks. Manufacturing slid by 6.0 percent.

Consumer goods production dropped 0.8 percent, while capital goods output plunged 25.5 percent -- a sign of waning investment.

Headline inflation has averaged 9.6 percent since January 2010.

India's benchmark Sensex index is down over 22 percent this calendar year, making it one of the worst performing in the region. The rupee is down about 14 percent this year and recently hit a lifetime low.

The Ministry of Finance last week trimmed its growth projection for the fiscal year through March to around 7.5 percent, down from an earlier forecast of 9 percent.

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