India Manufacturing Output Gains Most in 1 1/2 Years (Update1)
By Kartik Goyal
March 1 (Bloomberg) -- India’s manufacturing output climbed the most in 1 1/2 years in February, vindicating Finance Minister Pranab Mukherjee’s decision to raise taxes to prevent excessive demand from fueling inflation.
HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index rose to 58.5 last month from 57.6 in January, according to a report released today. That was the 11th monthly reading above 50, which indicates a gain in factory production.
Finance Minister Mukherjee in his Feb. 26 budget said India has weathered the worst global economic crisis since the 1990s, reversing some of the tax cuts initiated last year. Faster economic growth may fuel inflation and prompt Reserve Bank of India Governor Duvvuri Subbarao to raise interest rates.
“The economy looks to be bumping up while inflation rates are very elevated,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. “By failing to withdraw more of the fiscal stimulus the government has effectively placed the policy tightening ball in the RBI’s court.”
Mukherjee raised the excise tax on almost all consumer products to 10 percent from 8 percent and increased customs duty on overseas purchases of crude oil, prompting companies such as Indian Oil Corp., the nation’s biggest refiner, and Hindustan Petroleum Corporation Ltd. to boost prices.
Passing on Costs
“High input prices and rising demand are likely to prompt firms to gradually pass on more of their increased costs to companies,” said Sonal Varma, an economist at Nomura Holdings Inc in Mumbai. “As the recovery becomes more inflationary, we expect the RBI to raise rates by 100 basis points in 2010.”
India’s central bank on Jan. 29 increased the so-called cash reserve ratio by 0.75 percentage points to 5.75 percent, a move expected to drain about 360 billion rupees ($7.77 billion) of excess money from the banking system. The bank left its benchmark reverse repurchase rate unchanged at 3.25 percent.
Kaushik Basu, chief economic adviser at India’s finance ministry, said higher taxes would aid the fight against inflation as a wider budget deficit would stoke prices in the long term.
“The deficit has very long-run implications for inflationary pressures,” Basu told reporters on Feb. 26. “If you continue with a sustained high deficit it feeds into inflation,” he said.
Finance Minister Mukherjee last week unveiled budget proposals featuring tax increases and 400 billion rupees of state asset sales to help shrink the deficit to 5.5 percent of gross domestic product in the year starting April 1 from a 16- year high of 6.9 percent of GDP in the previous 12 months.
India’s industrial production rose 16.8 percent in December from a year earlier, the fastest pace in 16 years.
Sales at passenger carmakers including Maruti Suzuki India Ltd., Hyundai Motor Co.’s local unit, jumped 32 percent in January from a year earlier to a record 145,905 units, the Society of Indian Automobile Manufacturers said Feb. 9.
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