India Industrial Output Slides in Sign Economy Is Faltering

Indian industrial production slid in June for the third time in four months, with output of capital goods plunging the most on record, adding to signs of faltering growth in Asia’s third-largest economy.

Production at factories, utilities and mines declined 1.8 percent from a year earlier, after a revised 2.5 percent rise in May, the Central Statistical Office said in New Delhi today. The median of 27 estimates in a Bloomberg News survey was for a 0.4 percent climb. Capital goods output, an indication of investment in plants and machinery, slid 27.9 percent.

Indian manufacturing has been subdued in recent months as inflation above 7 percent saps domestic demand and Europe’s debt crisis crimps exports. Price pressures from a drop in the rupee and the impact of a weak monsoon on crops forced the central bank to leave interest rates unchanged in July, breaking with a wave of cuts in borrowing costs from China to Brazil to Europe.

“The negative trend coming in between a looming drought- like situation is very, very worrying,” said Brinda Jagirdar, an economist at State Bank of India in Mumbai. “Our problems are compounding. We need quick and decisive policy actions to revive growth, otherwise we’ll see a severe collapse.”

The rupee, which has slumped about 18 percent against the dollar in the past 12 months, strengthened 0.2 percent to 55.295 per dollar at the 5 p.m. close in Mumbai. The BSE India Sensitive Index of stocks pared earlier gains and fell 0.2 percent. The yield on the 8.15 percent government bond due in June 2022 was little changed at 8.14 percent.

Outlook Dims

Manufacturing fell 3.2 percent in June from a year earlier, today’s data showed. Mining gained 0.6 percent and electricity output rose 8.8 percent. A separate report in China showed that nation’s industrial production advanced 9.2 percent in July from a year earlier, less than analysts had estimated.

The drop in Indian capital goods production in June from a year earlier is the steepest since at least April 2006, according to data compiled by Bloomberg.

Forecasters from Goldman Sachs Group Inc. to Citigroup Inc. this month lowered predictions for Indian economic expansion while raising inflation estimates and scaling back expectations for interest-rate reductions by the Reserve Bank of India.

Goldman cut its growth outlook for the 12 months through March 2013 to 5.7 percent from 6.6 percent and said wholesale prices may climb 7.2 percent, up from an earlier estimate of 6.5 percent. Citigroup said Indian gross domestic product may rise as little as 4.9 percent in 2012-2013 if a drought takes hold. India’s more than 235 million farmers depend on the rains.

Chidambaram’s Challenge

The Reserve Bank left the benchmark repurchase rate at 8 percent on July 31, while cutting the amount of deposits lenders must keep in government bonds to spur lending. Headline inflation was 7.25 percent in June, the fastest pace among the world’s largest emerging markets.

Finance Minister Palaniappan Chidambaram, who was appointed last week, has said he intends to take steps to reverse the slowdown in manufacturing. He has also pledged to clarify tax laws and contain the budget deficit as he tries to assuage concern that the nation’s outlook is deteriorating.

India will reassess its fiscal deficit goal for the 12 months that began April 1 after a mid-year review, Chidambaram said today in a written response to questions from lawmakers. Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the gap will widen from 5.8 percent of GDP in 2011-2012.

Development Agenda

Graft scandals, political gridlock over attempts to liberalize the economy and below-average rains have set back Prime Minister Manmohan Singh’s development agenda. Power outages on July 30-31, India’s worst, have underscored gaps in infrastructure as investment moderates.

Slower growth has affected companies such as steelmakers. Production of the alloy by businesses including Tata Steel Ltd. fell 0.5 percent in June from a year earlier after a 4.9 percent gain in May, Commerce Ministry data shows.

Indian GDP rose 5.3 percent in the first quarter from a year earlier, the least since 2003. Standard & Poor’s and Fitch Ratings have warned they may strip the nation of its investment- grade credit rating, citing risks including fiscal and current- account deficits.

Today’s factory output report is disappointing, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, told reporters in New Delhi. The commission may revise its economic growth estimate for the current fiscal year in September, he added.

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net.

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