BackGood news at last, but will RBI blink?
Factory output grew 2.7% in August; retail inflation declined to 9.73% in September
Premium(Mint)
New Delhi: In what is a serving of good news, industrial growth showed a marginal pickup while retail inflation dropped below double-digit levels.
India’s factory output, led by manufacturing, grew 2.7% in August, while retail inflation dropped to 9.73% in September.
But the big question is whether it is sufficient to convince the Reserve Bank of India (RBI) to cut key rates at its policy review due later this month.
India’s retail inflation also fell below the double-digit mark in September, though prices of vegetables, sugar and pulses continued to remain high. The Consumer Price Index (CPI) rose 9.73% in September compared with 10.03% in August, data released by the government shows.
“The IIP number does indicate that there is some turnaround as far as the manufacturing sector is concerned. I do expect in coming months the growth rate will further pick up and year as a whole we can still see manufacturing growth at 3-4%," said C. Rangarajan, chairman of the Prime Minister’s economic advisory council.
“I think monetary policy will largely be determined by the behaviour of inflation. We are yet to see inflation figures for another month and that will indicate in what direction RBI will be moving," he said.
Inflation figures for September, based on the Wholesale Price Index (WPI), will be released on Monday. Economists expect this number to be around 7.8-7.9%, higher than the 7.55% reported in August.
Rohini Malkani, an economist at Citigroup India, in a note said that though both sets of macro data “are trending in the right direction, the levels are far from encouraging".
Though the chances of a rate cut by RBI in the forthcoming policy have increased, the WPI inflation numbers and doubts over implementation of the promised fiscal consolidation measures by the government will be the key factors to watch out to, she said.
In the last two months, India effected an increase in the price of diesel, limited the supply of subsidized cooking gas and relaxed foreign investment rules governing retail, airlines, and cable and satellite broadcasting companies. The cabinet also recently cleared a proposal increasing the foreign direct investment ceiling in the insurance and pension sectors to 49%.
But analysts are not very confident about the government’s ability to push through these reforms, given political compulsions.
Finance minister P. Chidambaram had expressed hope that the central bank will respond positively to the reform measures taken over the recent weeks and cut key interest rates in its mid-year review on 30 October to promote growth. In its mid-quarter review of the monetary policy last month, RBI did not lower the repo rate, but reduced the cash reserve ratio by 25 basis points. A basis point is one-hundredth of a percentage point.
According to data released by the ministry of statistics and programme implementation, manufacturing in August grew 2.9%. Mining was up 2% and electricity rose 1.9%.
Capital goods continued their dismal performance, contracting 1.7% in August.
Consumer goods, however, grew at a robust 5% on the back of good growth in both consumer durables and non-durables. While consumer durables grew 4%, consumer non-durables rose 5.8%.
Thirteen out of the 22 industries registered positive growth compared with the year-ago period, including publishing, printing and reproduction of recorded media, and radio, TV and communication equipment and apparatus. Office, accounting and computing machinery, and motor vehicles, trailers and semi-trailers were the industries that saw a contraction in August.
In the first five months of the fiscal year (April-August), IIP growth was flat at 0.4%, compared with 5.6% in the year-ago period.
“Both external and domestic demand impact industrial production. Exports are contracting and investments are also yet to pick up," said Sonal Varma, India economist at Nomura Financial Advisory and Securities (India) Pvt. Ltd. “In the near term, it is unlikely that IIP will see a good pickup."
“The consumer goods category has seen a rebound this month. If globally the situation improves, then this category will at least not see a contraction," she added.
Though CPI inflation came in lower than expected, economists point out that this could be because the diesel price hike was not factored into the calculations of the index. Prices of fuel rose only 7.29% in September compared with the year-ago period. “With the pass-through of diesel price hikes likely to take effect soon, we expect CPI inflation to head back into double digits next month," Varma said.
Prices of vegetables were up 14.37%, sugar 19.4%, and protein products such as pulses 16.2%.
“After a long time, India’s growth and inflation data are moving in the right direction. But it may not be enough to prompt RBI to take action," Varma said.
PTI contributed to this story.
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