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Business News/ Politics / Policy/  May factory output growth slows as consumer goods contract
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May factory output growth slows as consumer goods contract

Mining production picked up to grow at 2.8% compared with 0.2% in the previous month, while manufacturing grew 2.2% against 4.2% in April

Electricity output, which contracted 0.5% in April, recovered to grow at 6% in May. Photo: BloombergPremium
Electricity output, which contracted 0.5% in April, recovered to grow at 6% in May. Photo: Bloomberg

New Delhi: Belying expectations of an industrial recovery, India’s factory output growth slowed to 2.7% in May as production of consumer goods contracted after a momentary pickup in April, signalling that rural demand remains fragile amid weak monsoon rainfall.

Index of Industrial Production (IIP) growth for April, too, was revised down to 3.4% from the provisional figure of 4.1% released earlier.

In May, mining production picked up to grow 2.8% compared with 0.2% in the previous month, while manufacturing grew 2.2% compared with 4.2% in April. Electricity output, which contracted 0.5% in April, recovered to grow 6% in May.

Delayed and deficient monsoon rains last year, followed by unseasonal rains that damaged winter crops this year and limited increases in the prices of agricultural produce have hurt farm incomes and crimped consumer demand in the countryside.

That, in turn, is holding back a faster recovery in factory output growth. The government forecaster’s prediction of sub-par rainfall for the second year in a row has also hurt consumer sentiment.

“The consumer durables sector needs to revive to kick-start the demand side recovery process," said CARE Ratings chief economist Madan Sabnavis, adding that signs of a turnaround may be visible only in September, “when the festival season also commences with the harvest".

Progress of the monsoon will be key to revival of rural demand. After a month of adequate rains in June, monsoon rainfall in India was 51% less than normal last week, according to the India Meteorological Department. While all regions of the country received less than normal rainfall, central and peninsular India suffered the most.

The performance of the monsoon in July and August will be important for the sowing season.

Although the southwest monsoon was vigorous over northern parts of the country during some days of the week, most of the country experienced dry conditions in the first week of July. For the country as a whole, rainfall from 1 June to 8 July was 4% below the long-period average.

Not much improvement can be expected in July, according to government weather forecasters. Rainfall is expected to be subdued over many parts of western India, central India and interior peninsula, the Met department warned on Thursday.

The volatile capital goods sector recorded muted growth of 1.8% in May following a downward revision to 6.8% growth in April. Despite this, the capital goods sector wasn’t a drag on the headline number as IIP excluding capital goods was recorded at 2.8%, unchanged from April.

Some other data sets also do not seem encouraging for the economy. Car sales in June grew 1.53% from a year ago, the slowest in eight months. Total sales of passenger vehicles, which include utility vehicles, vans and cars, declined 0.54% to 217,642 units, industry body Society of Indian Automobile Manufacturers said on Thursday.

The Markit India Business Outlook survey released on Friday showed that levels of confidence of private sector firms have deteriorated to +22% in June, the lowest since composite data first became available in October 2009.

Reserve Bank of India (RBI) governor Raghuram Rajan said earlier this month that India’s economic growth is set to accelerate as capital investments gather pace and the government tackles bottlenecks that have stalled industrial projects.

“We see some signs of capital investments picking up. There is a continuing need, which the government is trying to address, of putting some of the stalled projects back on track," Rajan said after the central bank’s board meeting in Chennai.

RBI in June forecast economic growth to be 7.6% in the year to next March against 7.3% in the previous year. The International Monetary Fund on Thursday upheld its earlier projection of 7.5% growth for India’s economy in 2015-16.

Yes Bank Ltd, in a report released on Friday, said it expects the economy to grow 7.8% in 2015-16.

“Given the limited ability of private sector to support revival in capex on account of overleveraged balance sheets, moderation in rural dispensation and the stress of impaired loans on bank balance sheets, the recovery in FY16 would remain modest," it added.

Sabnavis, however, said the numbers may still not be relevant from the point of view of RBI, which would keep an eye on the progress of the monsoon and its impact on inflation before taking action.

Retail inflation, based on the Consumer Price Index, rose marginally to 5.01% in May from 4.87% in April, mainly on account of higher fuel prices.

RBI reduced its policy rate by 25 basis points in its monetary policy last month and hinted at a pause in further policy easing. Since January this year, the central bank has cut the key policy rate by 75 basis points. A basis point is one-hundredth of a percentage point.

The next monetary policy review is scheduled for 2 August.

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Published: 10 Jul 2015, 05:56 PM IST
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