India started the year on an actionable note by sharply cutting interest rates and unveiling another stimulus package.

The Reserve Bank of India lowered its repurchase rate by one percentage point to 5.5%, and lowered the reverse-repurchase rate by one percentage point to 4%.

As part of its stimulus plan, the government eased inflation controls and raised the overseas investment limit to $15 billion from $6 billion. India’s federal government also green-lighted state-level initiatives to raise an additional $6.18 billion (300 billion rupees) in the year to March 31 for infrastructure projects such as roads, schools and hospitals.

The government will also offer $4.12 billion (200 billion) rupees to state-run banks and $5.15 billion (250 billion rupees) to non-bank finance companies to raise capital, The Wall Street Journal reported.

To make this possible, India lowered the cash reserve ratio – the proportion of deposits banks are required to set aside as cash – by a half percentage point to 5%, effective Jan. 17.

“It is expected that the reduction in the policy interest rates and the CRR [cash reserve ratio] will further enable banks to provide credit for productive purposes at appropriate interest rates,” the Reserve Bank said in a statement.

Though India isn’t likely to sink into recession, the global financial crisis has no doubt blunted that country’s growth prospects – as its currency, stock market, consumer demand and production have all taken sharp losses in 2008.

“There’s still scope for rate cuts as the economic picture is quite bleak,” K. Ramanathan, who manages the equivalent of $2.2 billion in Indian debt at ING Investment Management in Mumbai, told Bloomberg. “The policy response to the unfolding economic slowdown is quite satisfying.”

Anticipation of the news of the rate cut and stimulus sent India’s benchmark Sensex 30 Index to a two-week high. The country’s benchmark 10-year bond yield dropped to 5.10%, down from 5.39% the day before.

The Sensex fell 52% in 2008, its biggest drop since data became available in 1980, and possibly its largest drop ever.

In the quarter ended Sept. 30, India’s economy grew at a 7.6% pace, better than expected but also its slowest pace in almost four years. The World Economic Forum (WEF) and Confederation of Indian Industry predict India will grow at a rate of 7.4% to 7.8% in the 2008-2009 fiscal year.

A recession is “not going to happen,” said Karim Rahemtulla, a Money Morning guest columnist Karim Rahemtulla who observed firsthand India’s prospects last year when he led an investor’s field trip around the country.

But Rahemtulla was just as quick to credit the Reserve Bank of India for taking action as the global financial crisis spread across the world.

“They have explicitly stated they will aggressively promote fiscal and monetary stimulus to promote growth,” Rahemtulla said.

India’s current fiscal year ends March 31, 2009. This is the fourth time since October the government has lowered its primary interest rate.

“The fundamentals of our economy continue to be strong,” the Reserve Bank said. “Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable.”

News and Related Story Links:

• The Wall Street Journal:
  India Cuts Rates, Unveils Stimulus Package

• Reserve Bank of India:
  RBI Announces Further Monetary Stimulus

• Bloomberg:
  India Cuts Rates, Unveils Package to Spur Economy

By Jason Simpkins
Associate Editor

China will overtake the United States as the world’s largest producer of manufactured goods by next year, according to forecasts by economics consultancy firm Global Insight Inc. done on behalf of the Financial Times. 

China will account for 17% of the world’s manufacturing value-added output next year, versus the United States’ 16%, the FT reported.

In 2007, the United States accounted for 20% of manufacturing output worldwide, while China made up just 13.2%. Also, last year, Global Insight predicted the United States would hold its top position until 2013, but a severe economic downturn has expedited China’s rise to the top.

China accounted for a mere 3% of global manufacturing in 1990, but its unprecedented rate of growth has made an economic miracle of the communist state.

John Engler, president of the National Association of Manufacturers, told the FT that it was “inevitable” that China would take over, if for no other reason than its size.

“This should be a wholesome development for the U.S.,” Engler said, “For it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest-growing economy.”

China’s customs agency said yesterday (Monday) that July exports soared 26.9% to $136.7 billion. The nation’s global trade surplus was $25.3 billion in July, up 4% from a year ago.

"Though we expect a continued deterioration as the year goes on, as American and European consumers stay at home, the resilience of demand for China’s exports is still remarkable," said Standard Chartered economist Stephen Green in a report to clients.

China’s economy expanded by 10.1% in the second quarter of 2008, while U.S. gross domestic product edged up just 1.9% in that time. The U.S. economy grew at an anemic 0.9% pace in the first quarter after contracting slightly in the fourth quarter of 2007.

News and Related Story Links:

• Financial Times:
  China to overtake US as largest manufacturer

• Associated Press:
  China’s July trade surplus $25.3 billion

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