By Kartik Goyal March 12 (Bloomberg) -- India’s industrial production rose 16.7 percent in January, diminishing spare capacity and contributing to inflationary pressures that may spur the central bank to raise interest rates within weeks. The expansion in output at factories and mines, announced by the statistics department in New Delhi today, came after a revised 17.6 percent gain in December from a year earlier, the fastest pace since at least 1994, according to Bloomberg data. India’s benchmark wholesale-price inflation may accelerate to a 16-month high of 9.67 percent in February, the median estimate of 16 economists in a Bloomberg News survey showed. India will unveil the inflation data on March 15. India and China, the world’s fastest-growing major economies, may withdraw more stimulus steps as stronger consumer demand stokes inflation. India’s inflation rate could surge to “double digits,” central bank Deputy Governor Subir Gokarn said yesterday, pushing bond yields toward a 17-month high. “The urgency to tighten monetary policy is much higher in India than in the case of China,” Kevin Grice, an economist at Capital Economics Ltd. in London, said before the report. “The key issue is, central banks across Asia do need to tighten policy over the next 12 months.” Consumer prices in China rose 2.7 percent in February from a year earlier. Inflation Challenge The benchmark Sensitive stock index erased gains after the report, and was little changed at 17,163.79 as of 12:20 p.m. in Mumbai. The yield on the 10-year government bond was also unchanged, trading at 7.99 percent. Inflation has returned to Asia as growth accelerates amid the global economic recovery. Industrial production rose 20.7 percent in China in the first two months of 2010, the most in more than five years, and 12.7 percent in Malaysia in January. Malaysia last week increased its overnight policy rate, saying it wants to avoid “financial imbalances.” China ordered banks to set aside more deposits as cash last month for a second time while India raised its cash reserve ratio to 5.75 percent from 5 percent in January. Indian central bank Governor Duvvuri Subbarao, who has kept the benchmark reverse repurchase rate unchanged at a record-low 3.25 percent since April, said this week that farm prices, the main contributor to inflation, are declining and manufacturing inflation is gathering strength. Strong Manufacturing The wholesale manufactured-products inflation rate rose to 6.55 percent in January from 1.6 percent in October as companies including Steel Authority of India Ltd., the nation’s second- biggest producer of the metal, and Maruti Suzuki India Ltd., the maker of half the cars sold in the country, raised prices. India’s manufacturing output climbed the most in 1 1/2 years in February, according to HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index, which rose to 58.5 during the month. Manufacturing production rose 17.9 percent in January while mining gained 14.6 percent, today’s report showed. Electricity output rose 5.6 percent, according to the report. Gokarn said yesterday inflation may not stay at above 10 percent for long. The increase in wholesale prices stood at 8.56 percent in January. The central bank’s next monetary policy statement is due on April 20, though it can change policy rates at any time. Salary Impact “Stronger production and equally headstrong inflation will nudge the central bank to tighten monetary policy in the April meeting,” said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. “The recovery has firmly taken hold and the industry can live with the withdrawal of monetary and fiscal stimulus.” Finance Minister Pranab Mukherjee on Feb. 26 outlined steps to cut the budget deficit to 5.5 percent of gross domestic product in the year starting April 1 from 6.9 percent the previous year. He raised the excise tax on most products to 10 percent from 8 percent, paring back some fiscal stimulus. Consumer demand may still strengthen in Asia’s third- largest economy as Hewitt Associates Inc. expects salaries in India to grow at the fastest pace in Asia Pacific in 2010. Prospects of demand exceeding current capacity in India prompted Honda Motor Co., the world’s biggest motorcycle maker, to say this week that it will invest about 8.9 billion yen ($98 million) to build a second motorcycle plant in the country. ‘Favorable’ Demographics India offers better long-term returns on stocks than China as “favorable” demographics in the South Asian nation can boost consumption and sustain faster growth, Stephen Dover, who oversees $25 billion as managing director and international chief investment officer for Franklin Templeton Investments’ Local Asset Management groups, said in Singapore this week. About 150 million Indians are projected to join the workforce during the next decade as 440 million people are currently under the age of 18, according to the nation’s finance ministry estimates. India’s $1.2 trillion economy, the biggest after Japan and China, may grow 8.2 percent in the next fiscal year, compared with 7.2 percent in the current year to March 2010, the ministry said last month. “Production is growing at an above-trend rate,” Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney, said before the report. “With demand-side price pressures building up, the central bank looks almost certain to raise rates in the April 20 meeting, if not opting for an inter- meeting move before.” To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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