Indian bond traders are misreading growth signs

These are the responses to a government report early last week that showed production at factories, mines and power plants at its most anemic in six years.

Following the release of the industrial-production statistics, the 10-year bond yield in India came close to a six- week low.

By the end of the week, there were few takers for the "bond-bull'' scenario as inflation soared to a new 3 1/2-year high of about 8 per cent.

The Indian economy is slowing, though not to the extent where it makes sense to go long on bonds.

For a start, the paltry 3 per cent growth in the industrial- production index during March compared with a year earlier may not be an accurate reflection of real output.

"The index is based on 1993/94 and to that extent the base- year weights do not represent the present structure of industry,'' Saumitra Chaudhuri, chief economist at New Delhi- based rating company ICRA, wrote in a recent report.

For instance, the value of cars and sport-utility vehicles produced annually at Indian factories is three times as large as the output of two- and three-wheelers; still, the latter group is twice as important to the index as the former, Chaudhuri wrote.

Television sets, refrigerators and air-conditioning units are also underrepresented on the production gauge.
That isn't all.

Supply constraints
The index suggests a slump in the production of machines and equipment used in power distribution, even as companies such as Bharat Heavy Electricals that make boilers and other parts continue to overbook orders.

Simply put, it isn't lack of demand that's acting as a brake on production of electrical equipment, says the ICRA report. Either production has been disrupted, or the output is simply not showing up in the data.

Manufacturing in India is unlikely to fall off a cliff and certainly not because of a collapse in domestic demand caused by the high cost of capital. Where the drop in performance is most telling