Industrial production growth slowed for a second straight month to 2.6% in January, compared with 3.2% in the previous month, while retail inflation inched up to a four-month peak of 5.37% in February due to a return of price pressure in food articles after the favourable base effect started to wane. Analysts predicted another round of rate cut before June, saying the Reserve Bank of India (RBI) might “frontload” the reduction in policy rates to spur growth, as inflation could still undershoot the central bank’s target of below 6% by January 2016.
The index of industrial production (IIP) data for January released by the Central Statistics Organisation on Thursday showed mining and power generation recorded their worst performances since October 2013 and expansion in manufacturing slowed further. Although capital goods output, a gauge for fixed corporate investment, rose to its loftiest since June last year with a 12.8% expansion in January, consumer goods production, which had grown 0.3% in December after six straight months of contraction, dropped again, this time by 1.9%.
While fluctuation is inherent in the way capital goods output growth is measured, the persistent weakness in consumer demand suggests a broad-based rebound in the economy is still far away. The slowdown in the IIP also showed while the efficiency of the corporate sector seems to be improving, as reflected in the projected economic growth rate of 7.4% for 2014-15, industrial output is barely expanding.
The government, however, sharply revised up its December growth in the IIP to 3.2% against 1.7% announced earlier, primarily due to a significant revision of manufacturing growth to 3.8% from 2.1%.
Importantly, radio, TV and communications equipment and apparatus — which has been witnessing negative growth this fiscal, especially after the disruption of Nokia’s operations in Tamil Nadu — contracted 51.3% in January. The contraction in this segment has shaved off 1.6 percentage points from the IIP, the data showed.
Moreover, according to the advance projection of GDP data for the 2014-15 fiscal, based on the new series, gross fixed capital formation is expected to grow just 4.1%, higher than the 3% expansion in the last fiscal but much lower than that of 12.3% in as laste as 2011-12.
ICRA senior economist Aditi Nayar said the disconcerting contraction in output of three of the five use-based categories – consumer durables, intermediate goods and consumer non-durables – in January highlights that the moderation in retail fuel prices is yet to manifest in a pickup in consumer demand.
“We may not see material change in the economic scenario before the festive season but monsoon will be a very crucial event to watch. Also the steep hikes in excise duty and service tax rates are going to be inflationary,” said Rupa Rege Nitsure, group chief economist at L&T Financial Services. “They (RBI) have already reduced it (repo rate) twice this year so far and I feel they will frontload the reductions.”
