Weak April IIP data piles pressure on policymakers

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India's industrial output growth flatlined in April, piling pressure on policymakers to cut rates and revive the economic fortunes of the BRIC nation that Standard & Poor's warned could be downgraded to junk status because of political inaction.

The ratings agency said India's leaders had strayed from the path of economic liberalisation and the country could become the first of the BRIC nations - Brazil, Russia, India and China - to lose its investment grade credit rating.

High inflation and interest rates, splits in the top leadership and the euro zone debt crisis have weighed on Asia's third-biggest economy for more than a year. Economic growth hit its weakest pace in nine years in the quarter ending in March.

"The message is pretty clear," said Jim O'Neill , the Goldman Sachs economist who first coined the acronym BRIC to describe the world's leading emerging economies.

"You'd think it was sufficiently clear that Indian policymakers would want somehow to respond to some of these things, but they don't show any signs of it," he said.

Pounded by a barrage of bad news, business groups want action on long-promised-for measures to encourage investment.

But the government has found it difficult to implement even modest reforms. A public backlash against a recent petrol price hike forced it to temporarily shelve plans to cut costly diesel subsidies that economist say could ease pressure on the budget deficit.

Finance Minister Pranab Mukherjee, who has been criticised for scaring off foreign investors with badly timed tax reforms, promised action to restore confidence in the economy.

"We are taking several measures to kick-start the economy. The government is committed to ensure faster project clearances, attracting new investments, both domestic and foreign, fixing regulatory issues, etc to boost investors' confidence," Mukherjee told a meeting of bankers.

The head of one of India's leading business chambers, Assocham, met Prime Minister Manmohan Singh to urge him to fast-track major infrastructure projects and press the central bank to cut interest rates at its policy meeting on June 18.

India's benchmark 10-year bond yield and swap rates dropped to multi-month lows on expectations the Reserve Bank of India (RBI) would cut rates by at least 25 basis points and possibly cut required bank reserves as well.

'CLEAR NEED'

Tuesday's data showed industrial production rose just 0.1 percent in April from a year earlier, lower than a forecast in a Reuters poll of a 1.7 percent increase. That followed a 3.2 percent fall in March, revised figures showed.

"The data clearly points to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support," said Abheek Barua, chief economist at HDFC Bank in New Delhi.

Capital goods, which includes such items as factory machinery, fell 16 percent in April from a year earlier. This key investment indicator has risen only once in the last eight months.

Output in the mining sector, another key economic driver, fell 3.1 percent year on year in April, the second consecutive monthly decline.

Expectations of lower interest rates will be further moulded on Thursday by the release of benchmark wholesale inflation data for May, which a Reuters poll forecast to have reached a 2012 high of 7.6 percent.

S&P cut the outlook on its long-term rating on India to negative from stable in April. The BBB minus rating is the lowest investment grade level.

On Monday, the agency accused members of the ruling Congress party of a complacent belief that economic growth would come naturally thanks to India's demographics. It said the party's populist leader, Sonia Gandhi, held too much sway in the cabinet, leaving her reform-minded prime minister without political support.

S&P came under fire from some economists, business leaders and Indian media on Tuesday for the timing of its statement.

"A lot of what Standard & Poor's said was valid, but the timing was misguided and misplaced," Barua said. "It just added to the negative sentiment. Some degree of caution from the rating agencies is called for."

BRIC HITS A WALL

India's lackluster growth, along with Brazil's woes, has tarnished the BRIC nations' reputation as drivers of growth in the global economy.

Goldman's O'Neill wrote in a note this week that there was "a creeping perception that the great BRIC economic surge has come to an end". He said India scored the lowest in the group on many measures of productivity.

The slump in India's January-March GDP growth to 5.3 percent had sparked alarm in industry and calls for the government and the central bank to take action to revive an economy that was expanding closer to 10 percent a year before the 2008 global financial crisis.

That has spurred expectations the central bank will cut its repo rate by 25 basis points (bps) to 7.75 percent next Monday, adding to a 50 bps cut in April.

But the RBI faces tough choices. Several economists warned that a rate cut without policy measures to reduce supply bottlenecks will drive inflation higher.

"Monetary easing to boost aggregate demand without a supply response will prolong the fight against inflation," said Rajeev Malik, senior economist at CLSA Singapore.