New Delhi: India’s factory output slowed to 0.6% in February from 2.4% in January, signalling that economic recovery has yet to take firm root. Retail inflation, however, moderated in March for the first time in four months, though it remained in double digits.
The numbers encouraged some economists to maintain their forecast for a further cut in interest rates by the central bank at its next monetary policy review due on 3 May.
Data released by the Central Statistics Office showed consumer price inflation slowed to its lowest level in four months at 10.39% in March from 10.91% a month ago on the back of softening food prices.
Planning Commission deputy chairman Montek Singh Ahluwalia drew comfort from the fact that industrial production didn’t contract.
“I’m glad it’s not negative, it’s very low, not anything that one can point to as indicating a robust return of growth,” he said.
In February, mining contracted 8.1%, reflecting continued regulatory hurdles, while manufacturing showed signs of a revival with a growth of 2.2%. However, electricity production, which has been registering robust growth, contracted for the first time in seven years by 3.2%, indicating that the myriad constraints faced by the sector may be eroding its health.
In the April-February period, the Index of Industrial Production (IIP) slowed to 0.9% from 3.5% a year ago.
In February, while volatile capital goods grew 9.5%, signifying a swelling of investment demand in the economy, basic goods and intermediate goods contracted 1.8% and 0.7%, respectively. Consumer durables shrank 2.7%, indicating weak discretionary demand, while the consumer non-durables sector grew 2.9%.
In the fiscal year ended 31 March, car sales fell 6.7%, the first drop in 12 years. The Society of Indian Automobile Manufacturers lobby group expects car sales to pick up by 3-5% in 2013-14.
While economic activity remains weak, the better-than-expected reading of IIP supports the view of a gradual recovery in activity and the appearance of “green shoots” in the data, said Tushar Poddar, managing director and chief India economist at Goldman Sachs .
“We continue to expect a cyclical recovery in activity, becoming more pronounced in the second half of 2013. We maintain above-consensus view of 2013-14 GDP (gross domestic product growth) forecast at 6.4%,” he added.
The Asian Development Bank (ADB), in its Asian Development Outlook released on Tuesday, said India’s growth will pick up to 6% in 2013-14, slower than the government’s forecast of 6.2-6.7%. Economic growth for 2012-13 is estimated at 5%, the slowest in a decade.
ADB said that while an anticipated good monsoon and a pickup in rural consumption will boost growth, structural reforms are necessary to revive investment demand and tackle the rising current account deficit.
The Organisation for Economic Co-operation and Development on Wednesday, however, said that while economic growth is set to pick up for the US, Japan, Germany and China in the coming months, for India it continues to slow down.
The World Trade Organization (WTO) slashed its forecast for global trade growth in 2013 on Wednesday, saying it feared protectionism was on the rise. It cut its forecast for global trade growth in 2013 to 3.3% from 4.5%, but said this was just 2% in 2012. That was the smallest annual rise since WTO started keeping such records in 1981 and the second weakest figure on record after 2009, when trade shrank.
Shubhada Rao, chief economist at Yes Bank Ltd, said the improvement in IIP data is largely transient in nature and doesn’t indicate any significant change in the outlook for growth in the near term.
Kotak Mahindra Bank Ltd economists Indranil Pan and Madhavi Arora said in a research note that the wide gap between wholesale and retail inflation, and the high current account deficit will continue to limit scope for any significant monetary easing, though they expect a 25 basis points policy rate cut in the Reserve Bank of India’s (RBI’s) monetary policy review. A basis point is one-hundredth of a percentage point.
Rao said given the weakening growth momentum and moderating inflation trajectory, she expects RBI to ease policy rates by 50 basis points in 2013-14.
Reuters contributed to this story.