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Business News/ Politics / Policy/  Rate cut unlikely despite flat industrial growth
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Rate cut unlikely despite flat industrial growth

Analysts believe the Reserve Bank may hold rates as inflation in August could be higher than July's 6.9%

The industrial output estimates reveal that the performance of the economy continues to be disappointing.Premium
The industrial output estimates reveal that the performance of the economy continues to be disappointing.

New Delhi: India’s factory output stagnated in July, keeping up pressure on the central bank to cut policy rates when it reviews monetary policy on 17 September.

The Index of Industrial Production rose a miniscule 0.1%, mainly because manufacturing and mining slumped, contracting 0.2% and 0.7%, respectively. Electricity production also lost pace, growing only at 2.8% in July compared with 13.1% in the year-ago period.

The index had contracted 1.7% in June. In the first four months of the fiscal year till July, it contracted 0.1% compared with a 6.1% growth a year ago.

The industrial output estimates reveal that the performance of the economy continues to be disappointing, finance minister P. Chidambaram said in a statement on Wednesday, adding that the central government is working with the industry to find practical solutions to the problems. The Reserve Bank of India (RBI) is unlikely to pare interest rates because inflation remains uncomfortably high, analysts said. Since it’s expected that wholesale-price inflation in August will be higher than July’s 6.9%, “the odds indicate RBI will hold rates", Rohini Malkani, economist at financial services firm Citigroup India, wrote in a report on Wednesday. August inflation data will be released on Friday.

photoCapital goods, which signifies investment demand in the economy, contracted 5% in July, registering the 11th straight fall excluding February. Intermediate goods contracted 1.1%. Consumer goods grew at a paltry 0.7%, signalling pressure on consumption demand. While consumer durables grew 1.4%, consumer non-durables remained almost flat at 0.1% growth in July.

India’s economy faces a downgrade risk by rating agencies because of its mounting fiscal and current account deficits. Although the economy grew at 5.5% in the first quarter of this financial year, many private economists expect it to grow at below that level for the full fiscal.

Arvind Mayaram, secretary in the department of economic affairs in the finance ministry, on Tuesday promised tough measures to curb fiscal deficit, saying that RBI may rethink its monetary policy stance once the government takes such steps.

On Wednesday, the finance minister met nine public sector firms that collectively are sitting on a cash pile of 1.8 trillion to impress on them the need to fast-track their investments.

Speaking to reporters after the meeting, Oil and Natural Gas Corp. Ltd chairman Sudhir Vasudeva said that in the five years to March 2017, “the company plans to make an investment of 1.64 lakh crore. Current year capex plan stands at 33,650 crore". Analysts say that even if the government announces some comforting measures for the economy before Monday’s monetary policy review, RBI is unlikely to immediately change its stand. Petroleum minister Jaipal Reddy said on Tuesday an oil price hike was unavoidable, but did not say when the price will be raised.

“Given their hawkish stand on inflation so far, at best RBI may take a softer stand in its communication," said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, a private lender.

Commerce minister Anand Sharma has called a meeting of state chief secretaries to discuss ways to boost growth in manufacturing. Eight of the 22 industry groups in manufacturing registered growth in July compared with the corresponding month of the previous year.

The industry group “publishing, printing and reproduction of recorded media" showed the highest growth of 17%, followed by 12.5% in “machinery and equipment" and 8.3% in “textiles". But the industry group “electric machinery and apparatus" contracted 12.8%, followed by a 12.2% contraction in “office, accounting and computing machinery" and 11.5% in “furniture; manufacturing".

Had the “electrical machinery and apparatus" group, which contracted 41.1% during April-July, not been included in the manufacturing sector, cumulative growth in the first four months of this fiscal year would have been 2.4%, said Madan Sabnavis, chief economist at CARE Ratings, a domestic ratings company, which suggest the performances of many of the other industries had improved.

However, with car sales falling for the first time in 10 months in August, and motorcycle sales declining for the first time since January 2009, analysts expect factory output to remain sluggish in the coming months.

PTI contributed to this story.

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Published: 13 Sep 2012, 12:40 AM IST
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