India Factory Output Rises at Slowest Pace Since 2002

India's industrial production grew at the slowest pace since 2002 as borrowing costs at a six-year high discouraged consumers from buying cars, motorcycles and other goods.

Production at factories, utilities and mines rose 3 percent in March from a year earlier after gaining 8.6 percent in February, the statistics office said in New Delhi today. The increase was the smallest since February 2002. Economists surveyed expected a 5.8 percent increase.
Output is likely to be moderate this year as the fastest price gains in more than three years make it difficult for the central bank cut interest rates to stimulate demand. Sales at Maruti Suzuki India Ltd., the maker of half the cars sold in India, fell for the first time in more than two years in March.
``Industry is facing headwinds from tight monetary conditions, high raw material costs and weakening foreign demand,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``There is unlikely to be much scope to cut policy rates in 2008 to boost domestic demand.''
The Reserve Bank of India last month twice raised the proportion of deposits that lenders must set aside as reserves to prevent money supply in the system from adding to inflation. The ratio is now at a seven-year high of 8.25 percent. The bank wants to cool inflation, which is currently running at the fastest pace in more than three years.

Six-Year High
Borrowing costs near a six-year high are discouraging spending by consumers, who rely on loans to buy cars and motorbikes. Car sales rose 12 percent in the fiscal year, slower than the 22 percent gain in the previous period.
Sales at Bajaj Auto declined 10 percent in March and Maruti Suzuki said it sold fewer vehicles last month than last year.
``Higher interest rates have significantly impacted the businesses dependent on consumer loans,'' said Sunil Kant Munjal, Managing Director of Hero Group, which owns Hero Honda Motors Ltd., India's biggest motorcycle maker. ``There is a need for rates to come down.''
Manufacturing, which accounts for about 80 percent of India's industrial production, gained 2.9 percent in March from a year ago, according to today's report. Electricity output rose 3.7 percent and mining grew 3.8 percent. Production grew 8.1 percent in the year ended March 31.
``Given the current situation of high inflationary pressures, we do not expect interest rates to come down and consumer spending, may therefore, remain subdued during the next six months,'' said Kaushal Sampat, an analyst at Dun & Bradstreet.

18 Percent Decline
Concern that growth will slow, hurting profits, have contributed to 18 percent decline in the Bombay Stock Exchange's Sensitive Index, or Sensex, this year.
Still, Finance Minister Palaniappan Chidambaram's Feb. 29 budget announcement to reduce the tax burden on individuals and the proposed higher salaries for 4 million government employees may help accelerate consumption and spur industrial growth, economists said.
Chidambaram raised the income tax exemption limit to 150,000 rupees ($3,626) from 110,000 rupees, leaving more money in the hands of citizens. Later, on March 24 a government-appointed panel recommended higher salaries for workers, that may cost the government 79.75 billion rupees in the current fiscal. The government is yet to decide on raising salaries.
``The budget proposals of cutting excise duties on several items and raising the threshold on taxable income could boost consumer spending,'' Shashank Bhide, an economist with the New Delhi-based National Council for Applied Economic Research said.