In a tight corner

12 September 2012 By Jeff Glekin

Almost flat industrial production will help the new finance minister and the central bank trade a fiscal deficit cut for a rate cut. Without some action, a ratings downgrade looms. That threat could help overcome political resistance to reducing wasteful fuel subsidies.

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Data released by India’s Central Statistics Office on Sept. 12 showed July output at factories, mines and utilities was 0.1 percent higher than the previous year. That was slightly lower than a forecast of 0.3 percent growth in a Reuters poll, but an improvement on an annual contraction of 1.8 percent logged in June.
GDP grew at an annual rate of 5.5 percent in the last quarter, as compared to over 7 percent 12 months ago. Worries about inflation, currently running at 6.9 percent, have led the Reserve Bank of India, the central bank, to resist lowering interest rates, despite the slowdown in growth. The RBI is widely expected not to change its key lending rates when it reviews its monetary policy on Monday.
Manufacturing, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, contracted 0.2 percent in July from a year earlier compared with a contraction of 3.1 percent a month ago. Capital investment in the economy grew 0.7 percent in the second quarter of 2012 from a year earlier. Capital goods output, a key investment indicator, shrank an annual 5 percent in July. It has increased only once in the past 11 months.
India will have to raise the price of heavily subsidised fuels such as diesel, Oil Minister Jaipal Reddy said on Sept. 11, indicating that hikes could be announced within a week.

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