Industrial output barely grows in July, investment weighs

Industrial output barely grows in July, investment weighs

India's industrial production barely grew in July, hurt by weak investment that has become the beleaguered government's primary concern as it scrambles to revive a flagging economy with little help likely from the RBI in the short-term.

The data, released by the Central Statistics Office on Wednesday, showed output at factories, mines and utilities grew an annual 0.1 percent. Capital goods output, seen as a key indicator of future investment, slumped 5 percent.

The pace of industrial expansion was slower than a forecast of 0.3 percent growth in a Reuters poll. In June, output contracted 1.8 percent.

The data was more evidence that the problems afflicting Asia's third largest economy are far from over. GDP has grown 5.5 percent or less in the last two quarters, a far cry from the 7-8 percent growth seen in the preceding period.

With growth faltering, Indian firms are pleading with the central bank to lower lending rates, which are among the highest in major economies. But the central bank is loath to lower rates unless inflation comes down and the fiscal deficit is tackled.

"The data highlights structural weaknesses of the economy, with poor domestic demand amid political gridlock and contracting exports," said Dariusz Kowalczyk, senior strategist at Credit Agricole CIB in Hong Kong.

"It may lead to renewed expectations of a rate cut this month, although we believe that the odds still favour the RBI to stay put."

GRAPHIC-IIP, exports: link.reuters.com/gaj55s

To read -- BREAKINGVIEWS: India's bad economic data may spur better policy, click here

To read -- Expert views: Industrial output little changed in July, click here

Financial markets barely reacted to the data, underscoring low hopes the Reserve Bank of India will act when it reviews policy on Monday. The bank's hawkish stance contrasts with many other G20 central banks that are easing monetary conditions to support growth.

With no help from the central bank in sight, the government is asking cash-rich state-run firms to invest in the economy. Finance Minister P. Chidambaram on Wednesday held a meeting with heads of those firms to identify measures that will help boost their capital spending.

Capital investment in the economy grew a meagre 0.7 percent in the quarter ending in June from a year earlier. Capital goods output has grown only once in the past 11 months.

"New projects are not getting finalised very quickly. Last year as well as this year. There are no new projects. the quantity of projects is coming down," Bharat Heavy Electricals Ltd (BHEL.NS) Chairman B.P. Rao said after meeting the finance minister.

REFORMS STALLED

The latest economic report offers little respite for Prime Minister Manmohan Singh as he struggles to escape corruption scandals that have undermined his authority to push ahead with bold and politically unpalatable economic reforms.

With the economic slowdown beginning to bite India's middle class, Singh faces the challenge of reviving the economy before his government faces the polls in a series of state elections starting this year and leading up to a general election in 2014.

"India's problems are primarily structural and require structural solutions," said Rupa Rege Nitsure, chief economist at Bank Of Baroda In Mumbai.

Structural woes are also stoking inflation, which has barely dipped below 7 percent in nearly three years. Headline inflation probably picked up to 6.95 percent in August from 6.87 percent in July.

There have been a flurry of meetings of top government and Congress party officials in the past few days in an attempt to build a political consensus in the Congress-led coalition for policies to allow more foreign investment and cut subsidies.

Allowing foreign direct investment in domestic airlines is one pending measure and Civil Aviation Minister Ajit Singh on Wednesday said he was hopeful the policy would be implemented.

"We are talking to our allies, I have spoken to most of our allies," he said.

A senior Congress party leader told Reuters that party chief Sonia Gandhi had yet to decide on cutting subsidies on fuel, seen as the most urgent move to tackle a swelling deficit. Gandhi is seen as an obstacle to many free-market reforms.

Underlining the challenges facing the government, HSBC on Wednesday downgraded Indian stocks to "underweight" from "neutral", citing the government's lack of progress in fiscal or structural reform as one factor in its decision.

The chief executive of General Electric India, John Flannery, told a U.S.-India economics conference on Wednesday that, while the long term outlook for was good, India's challenges had hit investment.

"It's important for us as operators in India and the country ... to recognise that capital is mobile," he said. "There are a lot of alternatives for people to invest. India is a great market but not the only market."

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.

The sector is battling weak demand in both overseas and domestic markets. Annual merchandise exports have fallen in four of the last five months, while domestic car sales posted their first annual decline in 10 months in August.

With the manufacturing Purchasing Managers' Index (PMI) easing to a nine-month low in August, the outlook for the sector does not look promising.