Data points to tough times for Indian economy

Indian manufacturing activity contracted at the start of 2009 and its exports shrank at the end of 2008, pointing to more pain for Asia's third-largest economy as the sharp global slowdown bites.

Exports fell an annual 1.1 percent in December to $12.7 billion, a third straight fall, data showed on Monday, while a survey showed a third successive month of contraction in the manufacturing sector in January.

With growth forecast to hit a six-year low of 7 percent or less in the 2008/09 fiscal year ending March 31, three years of growth at or above 9 percent and ambitions of reaching double-digit rates are a fading memory.

"It'll take time for the economy to bottom out. Right now, the momentum is downwards," said Sonal Varma, an economist at Nomura. She expects the economy to hit a trough in the April-June quarter.

December's fall in exports was not as sharp as annual falls of 9.9 percent in November and 12.1 percent in October.

Imports rose 8.8 percent from a year earlier to $20.3 billion in December, although oil imports fell 30.9 percent to $4.7 billion.

That helped the trade deficit narrow to $7.6 billion in December compared with $10.1 billion in November.

"Overall, the outlook for exports remain subdued," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

"With subdued exports and capital flows waning, the rupee would remain weak compared with last year."

The ABN AMRO Bank purchasing managers'index (PMI) , based on a survey of 500 companies, rose to a seasonally adjusted 46.7 in January from November's 44.4, but still showed manufacturing activity was contracting.

A reading above 50 signals economic expansion while a figure below 50 suggests contraction.

"The details of the PMI survey suggest that the outlook for the sector remains worrisome," said Gaurav Kapur, a senior economist at ABN Amro Bank.

The acting finance minister said the government, facing national elections by mid-May, would look to boost demand in rural areas and industries that were highly labour intensive to counter the global slowdown.

"We have to concentrate on domestic demand creation. We must support the development of those sections which immediately boost growth and throw up employment opportunities," Pranab Mukherjee told reporters after meeting with the heads of state-run banks.

At a policy review last week, the Reserve Bank cut its growth forecast to 7.0 percent with a downward bias from 7.5-8.0 percent, bringing it more in line with private sector forecasts.

It left key interest rates steady, saying banks still had to pass on the benefits of previous cuts, but analysts expect another reduction in coming months to shore up the slowing economy.

On Monday, the head of leading lender State Bank of India said it may cut its prime lending rate further as liquidity is comfortable, although its bad loans may rise.

"We can deal with it, but we need to be vigilant about it," Chairman O.P. Bhatt told reporters.