ECONOMY | Staff Reporter, India

India’s industrial production may have dropped to 5% in August

However, the main problem for India right now is its unceasing inflation as fuel prices are raised despite falling global oil prices.

DBS says the Jul-Sep quarter has proven to be much weaker than earlier expectations as vehicle sales declined 10% and manufacturing PMI printed a lower than expected 50.5.

Here’s more from DBS:

Industrial production could slow to 5% YoY hurt by high interest rates and an unhelpful global backdrop. Core production, a sub-index of the production index, has already painted a weak picture for the month with core production down by 2.5% MoM and on-year growth of just 3.6%.

Vehicle sales are very weak with sales down 10% in August from levels in January. Taken together with the ominous signs in manufacturing and services PMI, which printed 50.5 and 49.5 in September, the Jul-Sep quarter has shaped to be much weaker than earlier expectations.

A key worry for India is the continued high inflation rates as fuel prices are raised despite falling global oil prices. The vulnerable fiscal position is emerging as a key factor in shaping the inflation-growth outlook as we had anticipated earlier this year. Faced with a large slippage relative to its budget target, the government has been forced to raise retail fuel prices and reduce the gap between ex-tax retail prices and international prices.

The recent weakness in the rupee has been a double whammy in this regard, raising the rupee denominated crude oil prices. It would be impressive enough for output to normalize in the Oct-Dec amidst worries of another global meltdown, and even such would imply GDP growth of about 7% in 2011/12. Earlier this week, we lowered our GDP forecast for 2011/12 and 2012/13 to 7.2% from 7.5%, which continues to keep us in the low end of consensus forecasts.

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