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New Delhi, Sept. 12: The growth in industry output hit a four-month low of 0.5 per cent in July and retail inflation remained high, dashing hopes of a quick economic revival and a rate cut by the Reserve Bank of India.
Factory output, as measured by the Index of Industrial Production (IIP), grew 2.6 per cent in July last year.
The manufacturing sector contracted 1 per cent, while electricity and mining grew 11.7 per cent and 2.1 per cent, respectively, in July.
Capital goods, an indicator of investment demand in the economy, contracted 3.8 per cent. Negative consumer sentiments also continued to affect overall factory output with consumer goods production contracting 7.4 per cent during the month.
“While we were hoping that slowdown in manufacturing had bottomed out, it appears from July numbers that manufacturing may not be out of the woods. It is worrying that deceleration in July is somewhat broad based, extending to consumer durables and capital goods.
“We look forward to the positive investment and infrastructure driven environment, and a robust decision making mechanism to improve ease of doing business,” Ficci president Sidharth Birla said.
During the April-July period of 2014-15, IIP has recorded a 3.3 per cent growth against a contraction of 0.1 per cent in the same period of 2013-14. IIP for June has been revised upwards to 3.9 per cent from the provisional estimates of 3.4 per cent released last month, according to data released by the Central Statistics Organisation. The industrial output growth had hit a 19-month high of 5 per cent in May.
“Mining has been a mild negative number, while electricity and manufacturing are in line.
“Going forward, we need to watch for coal/electricity related issues for IIP projections. We are yet to see sustained pick-up in capital goods — a barometer for investment. We maintain our 3.7 per cent IIP forecast for 2014-15. Second-half recovery will be crucial for this assumption,” Shubhada Rao, chief economist with Yes Bank, said.
Anis Chakravarty, senior director of Deloitte in India, said, “The July IIP number shows that mining and electricity are largely in line with expectations though manufacturing again disappoints. It is important that focus on manufacturing is sharpened if industry numbers are to pick up. There are risks that electricity numbers may suffer in the coming months, which can bring overall IIP down.”
Price trend
Easing prices of vegetables, cereals and petroleum products brought down retail inflation marginally to 7.8 per cent in August. Retail inflation stood at 7.96 per cent in July. In August 2013, retail inflation was at 9.52 per cent.
However, food inflation during the month under review rose to 9.42 per cent over 9.36 per cent in July, an official release said today. The rate of price rise in vegetables stood at 15.15 per cent in August against 16.88 per cent in the previous month.
Chakravarty said, “Though core inflation has come down we see an upside risk. At this point, we don’t think the RBI is going to modify the policy rates based on these numbers.”
There is a chance of CPI picking up towards the end of third quarter if structural changes in the food supply chain are not implemented per expectation.. Overall, it is important that the nominal anchor that the RBI has targeted remains in focus.”
A dip in crude oil prices and a pick-up in monsoon rainfall, which has the potential to raise farm output, may help contain inflation only in the short-term. The government needs to rein in subsidies instead of counting on taxes to meet its budget deficit target of 4.1 percent of gross domestic product, a seven-year low.
Reserve Bank of India in August kept its key policy rates unchanged and indicated that it was not ready to relax monetary policy yet. RBI kept the repo rate, at which it infuses liquidity in the system, at 8 per cent, and the reverse repo rate, at which it drains liquidity from the system, at 7 per cent, while lowering the statutory liquidity ratio, or the portion of deposits that banks must invest in government bonds, by half-a-percentage point to 22 per cent to free up funds for lending when credit growth picks up.
With the goal of lowering consumer price inflation to 8 per cent by January 2015 within sight, RBI signalled that its focus has now shifted to its target of bringing it down further to 6 per cent by January 2016, which may require interest rates to stay at or near current levels.
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