Factory output rebounds, May retail inflation cools
Jun 12 2014 , New Delhi
Capital goods growth hints at investment revival
Coming on the back of contracting factory output in two previous months, the latest IIP data springs hope of an economic revival. The index of industrial production (IIP) grew merely 1.5 per cent in the same month in 2013.
What made the economic outlook more encouraging was a further slide in consumer price inflation (CPI), which hit a three-month low of 8.28 per cent in May on subdued prices of vegetables, cereals and dairy products.
Industry and the government are desperately hoping for a substantial easing of inflation to create conditions for an interest rate cut, which can quickly revive the capex cycle, create demand in the economy and assuage the debt burden of several companies.
Industry body CII said the rebound in industrial growth was significant and had rekindled hope of an industrial recovery, which is critical to lift the economy to faster growth.
“All the three major segments of industry — mining, manufacturing and electricity — have posted growth, which is noteworthy. The capital goods sector saw double-digit growth, which can mark the beginning of an upturn in investments backed by an improvement in business sentiments and faster clearance of stalled projects,” said Chandrajit Banerjee, director-general of CII.
Production of capital goods, a barometer of demand in the economy, grew 15.7 per cent in April, in sharp contrast to a 0.3 per cent contraction in output in the year-ago month. Manufacturing, which constitutes over 75 per cent of the IIP, grew 2.6 per cent compared with 1.8 per cent growth in the prior year. The mining sector grew by 1.2 per cent against a 3.4 per cent drop last year.
A revision of the provisional data issued last month showed that the growth in industrial production was flat at 0.5 per cent in March. There has been a declining trend in factory output since October 2013; the IIP growth was slightly above zero each month since then barring January and March. The consumer durables segment contracted 7.6 per cent in April on the back of a 9.6 per cent decline in March.
As many as 14 of the 22 industry groups in the manufacturing sector showed growth in April. But production of consumer non-durables declined 3.3 per cent compared with a 11.3 per cent growth last year.
Icra senior economist Aditi Nayar attributed the higher-than-expected IIP growth to a sharp turnaround in the performance of capital goods. But she doubted whether the double-digit growth in the volatile capital goods index would persist in the coming months.
“A broad-based pickup in the pace of investment activity is yet to show,” Nayar said. “Although sentiments have improved considerably, the extent and pace of structural reforms initiated in the months ahead would critically influence the commencement of a durable investment-led revival in economic growth.”
On slowing retail inflation, she said notwithstanding the recent easing in food inflation, monsoon-related concerns have started to crystallise with a delayed onset and low precipitation so far. Also, stable core inflation and a favourable base effect in the coming months call for a cautious monetary policy stance.
Concerted efforts by the Central and state governments to initiate measures to ease supplyside constraints and address market inefficiencies can complement the central bank’s efforts to contain inflationary pressures, Nayar said.
A delay in revision of power tariffs and the gap in monthly revision of diesel prices are partly responsible for the easing of May CPI inflation.
Official data showed the rate of rise in food inflation slowed to 9.56 per cent in May from 9.66 per cent in April. Vegetable prices rose slower at 15.27 per cent while prices of cereals and their products became cheaper with rate of price rise falling to 8.81 per cent against 9.67 per cent a month ago. Likewise, rate of price rise in milk and milk products remained at 11.28 per cent, slightly lower than 11.42 per cent in April, official data showed.