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India Factory Output Unexpectedly Drops as Growth Ebbs: Economy

India Factory Output Unexpectedly Drops as Growth Ebbs
A laborer processes copper tubes at the Kamani Tubes Ltd. plant in Wada, Maharashtra, India. The statistics office’s Feb. 7 forecast for 5 percent economic growth this fiscal year would be the weakest since 2002-2003. Photographer: Brent Lewin/Bloomberg

India’s industrial output unexpectedly slid in December for a second month as demand falters in an economy expanding at the weakest pace in a decade.

Production at factories, utilities and mines fell 0.6 percent from a year earlier, compared with a revised 0.8 percent drop in November, the Central Statistical Office said in a statement in New Delhi today. The median of 29 estimates in a Bloomberg News survey was for a gain of 1 percent.

India’s elevated inflation of more than 7 percent has limited the extent its central bank can cut interest rates to boost demand, while an uneven global recovery has hurt exports. Finance Minister Palaniappan Chidambaram, who unveils the budget Feb. 28, has pledged spending curbs to ease price pressures amid wider government efforts to encourage a revival in investment.

“This set of data is really bad and there is a need to aggressively address risks to growth,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai. The report adds to the case for a reduction in borrowing costs, though the magnitude of cuts depends on the path of inflation, she said.

Prime Minister Manmohan Singh has stepped up efforts to spur the economy since mid-September, opening industries such as retail and aviation to more foreign investment and setting up a panel to speed up infrastructure projects. India has also eased caps on capital inflows and moved to limit fuel subsidies.

The rupee has risen about 2.8 percent against the dollar since then, while remaining 8.4 percent weaker in the past year. The currency was down 0.1 percent to 53.925 as of 12:49 p.m. in Mumbai, while the BSE India Sensitive Index climbed 0.3 percent. The yield on the 8.15 percent note maturing June 2022 rose two basis points, or 0.02 percentage point, to 7.88 percent.

Inflation Risks

Inflation, based on wholesale prices, decelerated to a three-year low of 7.18 percent in December. Consumer prices rose 10.79 percent in January from a year earlier, a report showed today. That’s the fastest in the BRIC group, which also includes Brazil, Russia and China.

The climb in the cost of living and risks such as a record current-account deficit limited India’s central bank to a quarter-point reduction in interest rates last month, the first cut since April 2012.

The current-account gap may widen to a record and be “significantly higher” in the 12 months through March 2013 than last year’s 4.2 percent of gross domestic product, Reserve Bank of India Governor Duvvuri Subbarao said yesterday.

The “external sector is very vulnerable,” inflation remains “high” and investment has declined, he added.

Budget Vow

Chidambaram has pledged to contain the fiscal deficit at 5.3 percent of gross domestic product in 2012-2013 and pare it to 4.8 percent the following year. He is seeking to lower the odds of a credit-rating downgrade.

The statistics office’s Feb. 7 forecast for 5 percent economic growth this fiscal year would be the weakest since 2002-2003.

The International Monetary Fund last week predicted an acceleration to 6 percent in 2013-2014. While India’s expansion remains one of the highest in the world, risks are on the downside, the Washington-based lender said.

Manufacturing dropped 0.7 percent in December from a year earlier, while capital goods output decreased 0.9 percent, today’s data showed. Mining fell 4 percent while electricity output increased 5.2 percent.

Companies such as motorcycle maker Hero MotoCorp Ltd. have reported declining profits, while higher costs led mobile-phone operator Bharti Airtel Ltd. to increase prices in January.

Elsewhere in the Asia-Pacific region today, Indonesia and Sri Lanka left borrowing costs unchanged.

In Europe, year-on-year U.K. inflation probably held at 2.7 percent last month, a survey of economists showed before a report today. Russia will probably refrain from easing borrowing costs after inflation surged to a 15-month high, a separate survey showed.

In the U.S., job openings likely rose in December to 3.7 million, while confidence among small businesses probably advanced in January from an almost three-year low, Bloomberg surveys showed.

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