New Delhi: In an unexpected and dramatic trend reversal, industrial output growth dropped in August to a 15-month low of 5.6%, suggesting a moderation in the country’s growth trajectory.
Industrial output growth in July, which had been provisionally estimated at 13.2%, has now been revised to 15.2%.
Growth in August fell far short of the 9.65% forecast in a Reuters poll of analysts. The volatility will make it more difficult for policymakers, especially the Reserve Bank of India (RBI), to assess economic conditions as they battle inflationary pressures.
RBI, which has already questioned the reliability of the data, has assumed a hawkish monetary policy stance, raising interest rates five times this year in a bid to douse inflation that was at 8.5% in August.
The stock markets, which fell after the industrial output data was released, would be closely watching the September inflation data, due on Friday.
Finance minister Pranab Mukherjee on Tuesday expressed disappointment at the slower growth in industrial production, but asserted that the economy remains healthy, led by increased investment and rising demand. The government expects the economy to grow 8.5% this fiscal.
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“(The trend is) a little disappointing. Let us see how it fares in annualized terms,” Mukherjee said. He, however, said demand remained strong demand for industrial goods.
“As you all know, Indian economy is on the path of robust growth, led by increased investment and capital inflows, stronger industrial output and rising aggregate demand,” Mukherjee said.
The Central Statistics Office, which releases the data, also revised the industrial growth figures upwards for May and July to 11.48% and 15.2%, respectively.
The volatility in industrial growth rates has been driven by the capital goods segment, which grew by 72% in July and contracted by 2.6% in August.
“It (the trend) is purely a cyclical movement. Sometimes it goes up, sometime goes down..,” finance secretary Ashok Chawla said. “We need to watch.”
Citigroup Inc.’s India economists Rohini Malkani and Anushka Shah wrote in a research note that the volatility in data is a concern and lumpiness in capital goods production appears to be impacting growth.
“Given uneven monthly trends, focusing on two-three months’ averages is key. The average growth of 8.8% seen during the last three months was in line with expectations. Taking into account the base effect, we expect industrial growth to come in at 7-8%,” they said.
Economists Sonal Varma and Ketaki Sharma of Nomura Financial Advisory and Securities (India) Pvt. Ltd said the contraction in capital goods production had been exaggerated.
“This is because intermediate goods output rose a robust 10% in August, suggesting raw-material demand for production remains strong, which will result in a rise in investment in the medium term as spare capacity gets utilized,” they said in a report.
However, other components of the Index of Industrial Production (IIP) also showed a moderation in growth. While electricity output grew by 1% in August, production of consumer non-durables contracted at 1.2%.
The data release comes at a time when the composite leading indicators (CLI) for August by the Organisation for Economic Co-operation and Development reinforced signals of slowing economic expansion.
The outlook given by CLIs for India, China, Brazil, Canada, France, Italy and the UK points strongly to a downturn, while stronger signals of a peak are emerging in the US.
The International Monetary Fund, in its latest World Economic Outlook report, said that in emerging markets such as India and Brazil, capacity constraints are beginning to boost prices, indicating that such economies may be overheating.
The sectoral breakdown of manufacturing in IIP, which slowed to 5.9% in August from 16.7% in July, showed 14 of 17 industries posted positive growth in July. The slowdown in growth can be attributed mainly to sub-components of capital goods—machinery and equipment—which decelerated to 0.4% in August from 57% in July.
Other sectors that saw a deceleration in growth were basic chemicals, jute and fibre textiles, and cotton textiles. Sectors in the red included wood products, textile products and basic chemicals.
Veena Mishra, chief economist at Mahindra and Mahindra Ltd, said ground-level data shows companies continuing capacity-building in sectors such as auto and steel.
She expects September and October industrial output figures to be higher than that of August due to pre-festival season bumper production.
“Production picks up just before the festive season as factories start stocking inventories. This may moderate the slowdown in factory output for next two months,” she added.
Economists said the deceleration may cause RBI to pause monetary tightening in its policy review on 2 November.
“August’s soft result may give the directors of the central bank in Mumbai reason to pause their monetary tightening agenda,” said Matt Robinson, senior economist at Moody’s Analytics.
“We expect RBI to keep policy rates unchanged at its 2 November policy meeting due to a moderation in non-food price inflation, the return to single-digit CPI (Consumer Price Index) inflation and the risk of higher interest rates exaggerating net capital inflows,” Varma and Sharma of Nomura said.
PTI contributed to this story.