3.4% growth in June IIP a sign of tardy pickup

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CPI inflation at 7.46%, much better than 9.64% a year ago

The subdued growth in industrial output at 3.4 per cent in June and rising retail CPI inflation at 7.96 per cent in July driven by high fruit and vegetable prices indicated economic pickup is still tardy, government’s monthly date released on Tuesday said.

India's June industrial production grew slower than expected year-on-year while consumer price inflation accelerated to a two-month high in July, indicating there was still some volatility, as it's early days for a decisive industrial recovery.

Month-on-month industrial output figures are not a good measure of performance. If one goes by the three-month rolling average, then the trend is positive, Crisil chief economist D K Joshi said, adding retail inflation spike in July is due to seasonal factors and it should slow down in the coming months.

Retail inflation measured on consumer price index (CPI) in June was 7.46 per cent (revised upwards from 7.31 per cent). It was at 9.64 per cent in the same month a year ago.

CII director general Chandrajit Banerjee said that growth in industrial production, which has been on the ascendant for the last two months, has shown a decline in June on the back of sluggish performance of the manufacturing sector.

“However, we would like to see this as an aberration, as CII’s own business outlook survey and the Ascon survey are showing early signs of an industrial turnaround,” he said.

“It is encouraging to see growth of manufacturing in the first quarter, highest since second quarter of 2011-12. Although the growth comes on a negative base, it seems to have bottomed out. This was also reflected in Ficci’s latest survey on manufacturing”, Ficci president Sidharth Birla said.

In fact, 15 out of 22 sectors have shown positive growth during June 2014. Capital goods in particular clocked double-digit growth in the first April-June quarter this financial year. Consumer goods were still a worry.

The official data showed that capital goods production grew by 23 per cent in June. It had contracted by 6.6 per cent in the same month last year. In April-June quarter this financial year, the capital goods output has grown by 13.9 per cent as compared to a negative 3.7 per cent in the same quarter last year.

The mining sector grew by 4.3 per cent in June this financial year as against a dip of 4.6 per cent in the corresponding period last financial year. Power generation increased by 15.7 per cent in June as against virtually no growth in the same month last year. “While capital goods have done well, manufacturing remains an area of concern. Besides, the June IIP numbers defy expectations of higher industrial expansion in June than in May,” Assocham president Rana Kapoor said.

“The data suggests that some bold measures are required in the next few weeks to instill real confidence among consumers and investors,” said Kapoor. “The FII inflows alone do not really point to a reversal.”

While mining remained largely flat, manufacturing disappointed at 1.8 per cent growth in June. Given the good performance of the core sector numbers at 7.3 per cent growth in June, some upside was expected on the IIP, which of course did not happen.

As IIP numbers are an important contributor to the quarterly GDP performance, “We do expect marginal improvements in GDP for April-June quarter based on improving industry numbers,” Deloitte chief economist Anis Chakaravarty said.

Weak industrial production is one of the main reasons for India's growth struggle. A fall in output last fiscal year resulted in the second successive year of below 5 per cent GDP expansion.

Although retail inflation looked seasonal, it is very difficult to say what will happen in August due to the backdrop of a weak monsoon.

Aditi Nayar, senior economist at Icra said food inflation rose in the just-concluded month, despite a subsiding of the monsoon deficit and the short-term steps taken by the government like imposition of minimum export prices on certain items.

The delayed sowing of crops as well as the shortfall in area covered so far suggest that prices may remain firm in the coming months, a key concern for ensuring CPI at or below 8 per cent by January 2015, as recommended by Urjit Patel committee.

The impact of geopolitical uncertainty, exchange rate movement and continuing supply constraints would keep inflation firm, she said, adding any improvement in demand conditions going forward may prevent a sustained easing of inflationary pressures.

“With such factors posing upside risks to the inflation target of six per cent for January 2016, Icra believes that the RBI would continue to focus on reining in inflationary expectations, resulting in a low likelihood of monetary easing in the remainder of 2014,” she said.


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