India Factory Output Beats Estimates as Outlook Stays Cloudy

Indian industrial production rose more than estimated in August, climbing for the first time in three months ahead of a policy revamp to revive the economy.

Output at factories, utilities and mines rose 2.7 percent from a year earlier after a revised 0.2 percent fall in July, the Central Statistical Office said in a statement in New Delhi today. The median of 36 estimates in a Bloomberg News survey was for a 1.1 percent gain.

Indian factory production has been subdued for most of this year as Europe’s debt crisis saps exports and elevated inflation curbs scope for interest-rate cuts to bolster spending at home. The government overhauled policies in September to lure more foreign investment, limit its budget deficit and steady the nation’s currency.

“Economic activity is still weak and below trend,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “I don’t think we should get too carried away with all this. But it is the strongest evidence to date that recovery is underway in India and March quarter was the bottom.”

Prime Minister Manmohan Singh’s government began the policy changes on Sept. 13 by announcing a rise in diesel prices to curb expenditure on fuel subsidies, before opening industries from retail to aviation to more investment from abroad. The cabinet this month decided to seek parliamentary approval for more overseas participation in the insurance and pension businesses.

Rupee Surge

The rupee has strengthened about 5 percent against the dollar since the overhaul, paring its loss in the past year to 7 percent. The currency was little changed at 52.64 per dollar as of 12:28 p.m. in Mumbai, while the BSE India Sensitive Index (SENSEX) of stocks fell 0.4 percent. The yield on the 10-year bonds due June 2022 climbed to 8.17 percent from 8.16 percent yesterday.

Gross domestic product in Asia’s third-largest economy may rise 4.9 percent in 2012, the weakest pace in a decade, the International Monetary Fund said this week. The country’s trade deficit widened to $18.1 billion last month as exports dropped 10.8 percent from a year earlier.

Standard & Poor’s reiterated two days ago that the nation could lose its investment-grade credit rating within the next 24 months if growth slows further and political opposition to policy overhauls increases.

S&P predicted a budget shortfall of about 6 percent of gross domestic product in the financial year through March 2013, compared with the government’s target of 5.1 percent.

Reform Outlook

“Twenty-four months is a long time,” Finance Minister Palaniappan Chidambaram said in Tokyo yesterday, where he is attending the IMF annual meeting. “You will see a lot of reform, a lot of change, a lot of strengthening of the Indian economy.”

Manufacturing rose 2.9 percent in August from a year earlier after a fall in the previous month, while consumer-goods output advanced 5 percent, today’s data showed. Mining climbed 2 percent and electricity output climbed 1.9 percent.

The Reserve Bank of India, which has left interest rates unchanged for the past three meetings since a cut in April, has previously signaled that narrowing the budget gap would increase scope for reductions in borrowing costs.

Headline inflation, as measured by the wholesale-price index, accelerated to a nine-month high of 7.7 percent in September, according to the median estimate in a Bloomberg News survey ahead of a report due Oct. 15. The central bank has said the comfort level for price increases may be about 5 percent.

Consumer prices rose 9.73 percent in September from a year earlier, another report showed today. That’s the slowest pace in six months.

The Society of Indian Automobile Manufacturers predicts full-year domestic car sales growth of as little as 1 percent. Slower economic expansion, inflation and the cost of borrowing has damped demand for vehicles from companies such as Maruti Suzuki India Ltd., the nation’s biggest carmaker by volume.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

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

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