HSBC comments on soft industrial growth

Mumbai, May 12 (UNI) Expressing surprise over the three per cent year on year growth in Industrial production in India in March, the HSBC today said the growth was the weakest rate since February 2002.

It was down from 8.6 per cent in February, the banker said in an analysis here adding that the forecast was that industrial output was estimated to witness a 5.8 per cent growth. A three month moving average of the year on year rate which strips out some of the month to month volatility in the series also dropped to a new cycle low of 5.8 per cent --the softest since May 2003.

It said ''the underlying softening in industrial output is a trend which began in January 2007 and reflects a combination of the lagged effects of higher interest rates and a stronger exchange rate as well softer global growth and higher oil prices. The bad news is that, with the possible exception of the exchange rate, we haven't seen the full negative effects of these factors flow through into the economy yet''.

''With growth slowing and inflation still rising, the government's worst nightmare is coming true and there is no imminent end in sight''the report said adding that the policy authorities would be unpleasantly surprised by the strength and persistence of Wholesale price index (WPI) (and Consumer price index (CPI) inflation as well as the weakness of activity. ''Moreover, accepting a lower exchange rate, while tightening liquidity conditions is not the right response in our view'', it added.

Reiterating that the GDP would grow at seven per cent this fiscal, it said the forecast of a 7.8 per cent growth in 2009-10 was at risk if the Reserve Bank continued to tighten the monetary stance from here.

The breakdown of today's release showed consumer durables contracting 2.1 per cent (the eighth year-on-year fall in the last 11 months), while basic and intermediate goods grew just 3.1 per cent and 3.5 per cent respectively. The most worrying development, however, is the weakening in capital goods. April saw production in this key sector fall to 8.6 per cent from 10.4 per cent, while the 3 month moving average slipped to 7.1 per cent. The latter is the lowest since June 2002 and compares with a peak of 24.2 per cent just five months ago. ''Those believing that the investment sector would remain immune to the downturn will have been disappointed'' it said.

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