New Delhi: India’s factory output grew slower than expected in August, indicating that economic expansion may be losing steam at a faster rate than initially assumed while inflation remains high, thus increasing the dilemma facing the central bank ahead of its monetary policy review later this month. At 4.1%, the Index of Industrial Production (IIP) is at its second-lowest level in the last 17 months.
Finance minister Pranab Mukherjee said the data was not encouraging. “It is a bit disappointing and it may affect the” second quarter gross domestic product (GDP) growth rate, he told reporters in Delhi on Wednesday.
He said, however, that it would be premature to assess the extent to which the slowdown in IIP would affect growth.
The latest data shows the slowdown in industrial activity is diversified, said Samiran Chakraborty, head of India research at Standard Chartered Bank.
“Unlike in July, when capital goods dragged down industrial production, in August the slowdown is across all segments of the industry,” he said.
India’s growth may be slowing more sharply than currently assumed, Tushar Poddar and Prakriti Shukla of Goldman Sachs said in an analysis.
“The recent industrial production data, along with a host of other indicators, suggest growth is slowing faster than expected and the consensus estimates of growth still need to come down,” they said. “While IP (industrial production) has been volatile of late, the downtrend is unmistakable. A broader set of indicators suggest a sharper slowdown.”
Trade data, separately released by the commerce ministry on Wednesday, also showed exports and imports grew at the slowest pace in five months at 36.3% and 17.2%, respectively, indicating slower demand locally and overseas.
There are clear signs of the economy decelerating, with business and consumer confidence down all over the world, commerce secretary Rahul Khullar said.
Data released by the Central Statistics Office (CSO) showed manufacturing growth moderating to 4.5% in September, while mining contracted to 3.4%. Electricity generation, however, grew at 9.5%.
Eleven out of the 22 industry groups in the manufacturing sector, such as tobacco products, textiles, apparel, wood products, plastic products, machinery and equipment showed a contraction in production during August.
While intermediate goods remained lacklustre, growing at 1.3% in August due to trends in TV picture tubes and fibres, consumer goods continued to slow, growing 3.7%. Capital goods rose 3.9%, down from a revised 13.7% in July.
CSO revised the May IIP upwards to 6.2% from 5.9% and that for July to 3.8% from 3.3%.
Reserve Bank of India (RBI) deputy governor Subir Gokarn said on Wednesday the regulator will change its monetary policy stance only if inflation eases and that further rate increases will depend on prices.
“We raise rates not because it is an end in itself,” he said. “To the extent we see the problem persisting, then there is a basis to raise rates, but if we see the problem is starting to ease off, then that would provide the basis for a change.”
Headline inflation for September, due on Friday, is expected to remain close to the double-digit mark, though it may ease marginally from 9.78% in August.
Economists are more divided this time than ever before on whether RBI will continue to focus on fighting inflation and raise policy rates, or pause, given the clearer signs of growth slowing.
Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, expects RBI to pause on rate increases at the monetary policy review, irrespective of the inflation data for September. “RBI will continue its hawkish rhetoric, however, it will take a lot of guts to increase rates now,” he said.
Pan added that IIP is close to the contractionary zone and the global economic scenario is deteriorating as well, as reflected by the Purchasing Managers’ Index.
However, Standard Chartered’s Chakraborty said RBI may continue to increase rates unless there are clear signs of inflation coming down.