New Delhi: India's industrial output grew for a seventh month in July, adding to signs of economic upturn and to the case for a gradual tightening of policy, although weak exports and the impact of a poor monsoon are risks to growth.
Industrial output rose 6.8% in July from a year earlier, matching forecasts, and June's annual growth was revised up to 8.2% from 7.8%, a 16-month high, Friday's data showed. Manufacturing production rose 6.8% in July from a year earlier.
"High growth and inflation are quite correlated and if this growth sustains, it actually pushes up inflation and builds the case for a rate hike," said Abheek Barua, chief economist at HDFC Bank.
Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Thursday that while an exit from expansionary policy was needed, a balanced approach was necessary and the timing of a move was uncertain.
Barua said the RBI would want to keep rates on hold till the first quarter of 2010.
India's factories expand faster than those in most Asian countries but still lag China's scorching 10.8% growth during the same month and 12.3% in August.
A series of interest rate cuts between October and April backed by tax cuts and government spending revived demand in Asia's third-largest economy.
"Industrial output growth is clearly on a recovery path and we expect this momentum to continue," said Sonal Varma, an economist at Nomura
"Better industrial output growth and rising input cost pressures are paving the way for the RBI's gradual exit from the current loose monetary policy stance."
Demand from urban consumers is on the rise with car sales climbing by more than a fourth in August, rising for the seventh month on cheaper borrowing costs and new models.
Output of consumer durable goods rose 19.8% from a year earlier, while capital goods production grew 2%.
The expansion of the government's rural job scheme and upcoming festival demand may offset an expected decline in rural demand after the worst dry spell in nearly four decades smothered crops and eroded farm income.
The global slump continues to dent exports, which fell for the 10th month in July, hindering faster factory expansion.
A survey of 500 companies showed manufacturing expanded at its slowest pace in five months in August as firms struggled to raise prices despite higher costs.
Last week, the Planning Commission forecast a 7.8% expansion in factory output for 2009-10, but said economic growth could still be lower at 6.3% compared with 6.7% in the previous year.