Manufacturing output in Feb gains most in 18 months

Manufacturing output climbed the most in one-and-a-half 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.

Mukherjee, in his February 26 Budget, said India had 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 (RBI) Governor Duvvuri Subbarao to raise interest rates.

“The economy looks to be bumping up, while inflation rates are very elevated,” said 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 per cent from 8 per cent and increased Customs duty on overseas purchases of crude oil, prompting companies such as Indian Oil Corporation 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 RBI to raise rates by 100 basis points in 2010,” Varma added.