India’s industrial output grew 5.6% in May, the slowest in nine months, surprising analysts and offering further evidence of weakness in key sectors. Analysts said the central bank may still go ahead and raise policy rates in its first-quarter monetary policy review on 26 July as inflation remains the core concern.
The Central Statistics Office also revised the Index of Industrial Production (IIP) for February and April to 6.7% and 5.8% from the earlier provisional estimates of 6.5% and 6.3%, respectively.
The government last month changed the base year for IIP to 2004-05 from 1993-94. Based on the old series, industrial output grew 3.6% in May.
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Finance minister Pranab Mukherjee said the fresh data was “not encouraging”, adding that the government was in the process of taking steps to enhance the productivity of the manufacturing sector.
“I do not always take into account the monthly and weekly figures as the real trend-setter. At least quarterly figures will have to be taken into account. Otherwise, there are problems of course,” he added.
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During the month, while manufacturing registered 5.6% growth, mining grew at 1.4%, reflecting a delay in environmental clearances and transportation bottlenecks. The electricity sector grew at a robust 10.3%.
In terms of industries, 14 out of the 22 industry groups in the manufacturing sector showed positive growth in May compared with the year earlier. Textiles and wood products showed the most negative growth at 6.6% each. While capital goods continued to fluctuate, growing at 5.9%, intermediate goods saw a sharp slowdown to 0.9%, while basic goods led by steel were up 7.2%. Consumer goods were up 5.4%, led by non-durables (up 5.6%) while growth in durables continued to decelerate to 5.2% from double-digit levels earlier.
Reserve Bank of India (RBI) governor D. Subbarao last week criticized IIP data over sharp revisions from month to month, especially in capital goods, terming it “analytically bewildering”.
“It is important for policy purposes to determine whether the root cause of such behaviour is the production decisions in the wake of uncertainty or whether it is due to the compilation process,” he said.
Most analysts were banking on a favourable base effect for higher IIP growth, said Samiran Chakraborty, regional head of research at Standard Chartered Bank. “However, the downward trend in intermediate goods and loss of momentum in industrial activities are disturbing and confirms a soft patch in economic growth.”
The slowdown in the growth of intermediate goods—which mostly consists of raw materials—usually impacts growth in final goods with a lag, he said.
Higher interest rates, policy paralysis at government level and weak business sentiment may keep industrial growth subdued, he added, emphasizing that this was moderation and not a collapse in growth.
Chakraborty expects an economic recovery in the second half of the fiscal. “Much will depend on the policy initiatives taken by the government,” he said. “There are a whole bunch of economic legislations lying before the monsoon session of Parliament.”
Analysts believe the central bank is unlikely to pause and may further tighten monetary policy in order to contain inflationary expectations.
With Wholesale Price Index-based inflation “likely to remain elevated at 9-9.5% in the coming months and RBI reiterating that inflation is likely to get priority over growth, we maintain our view of RBI hiking rates by a further 50 basis points taking the repo rate to 8% by December”, said Citibank India economists Rohini Malkani and Anushka Shah in a macro-advisory.
Chakraborty said RBI is unlikely to alter its policy trajectory based on just lower IIP numbers. “If at all RBI decides not to hike interest rates on 26 July, then it will be more because of global factors such as any disastrous event happening in Europe.”
Graphic by Naveen Kumar Saini/Mint
PTI contributed to this story.