Weak recovery seen in industrial output as PM Modi courts investors

CPI inflation expected to rise to 5.4% in December

Held back by weak demand at home and abroad, Indian industrial output probably made a tepid recovery late last year, underscoring the challenges faced in 2015 by Prime Minister Narendra Modi as he seeks to woo global investors this week.

To accelerate the recovery in Asia's third largest economy from its longest slowdown since the 1980s, Modi has pushed through a raft of economic reforms, mostly by executive orders.

But global headwinds, lukewarm domestic demand and unused industrial capacity mean capital investment has not picked up and the economy remains way below potential.

Retail inflation - still a major issue for Asia's third largest economy though it fell to an all time low in November - probably rose sharply in December fuelled by higher food prices.

Analysts say there still remains a good chance that the Reserve Bank of India will cut interest rates, possibly after the government presents its annual budget in late February.

The first economic readings to be published in 2015 will be out on Monday, when the government releases industrial output data for November and the consumer price index for December.

According to forecasts from a Reuters poll of analysts industrial output was likely to show a 2.2% rise year-on-year in November, bouncing back from a 4.2% contraction in October, when Indian factories suffered their worst showing in three years.

Modi, hosting captains of industry in his home state Gujarat, said in a speech on Sunday that India's economic outlook was robust. India was the only large economy expected to grow more quickly this year than last, he said.

By-passing parliament to kick-start hundreds of billions of dollars in stalled projects, Modi's government issued an executive order on Dec 29 to ease land-acquisition rules in sectors like power and housing.

His government also drew some relief last week after some 300,000 coal workers ended a short strike against a move to open up industry for private firms.

PRICES

Consumer price inflation data, also due on Monday, was forecast to accelerate to 5.4% in December, after a record low of 4.4% in the previous month.

Since it remains within the central bank's target of achieving 6% retail inflation by January 2016, analysts expect the RBI could soon cut interest rates following a hefty reduction in the oil import bill.

"We expect the RBI to cut the repo rate by a total of 50 bps after the Union Budget for 2015-16 is presented," said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody's.

RBI has kept interest rates unchanged at 8% over the past year, ignoring suggestions from the government and industry to ease monetary policy.

The RBI will hold its next rate review in early February, while Finance Minister Arun Jaitley presents India's 2015-16 budget later that month.

Concerned over slow economic growth, some government advisers have favoured loosening fiscal deficit targets to fund infrastructure projects that could help the stuttering economic growth - which slowed to 5.3% in July-September quarter.

Analysts, however, warn against loosening targets for the fiscal deficit - which the government is aiming to restrain to 4.1% of GDP in the current fiscal year, ending in March.

"The budget should focus on trimming of unproductive schemes, paring of subsidy expenditure would help free up resources to boost infrastructure spending," Nayar said.