New Delhi: India’s factory output growth slowed to 3.8% in September from an upwardly revised 4.5% a month ago, but a sector-wide break-up showed stability gradually returning to the industrial sector after the disruptions caused by demonetization and the goods and services tax (GST).

In anticipation of GST implementation starting 1 July, producers reduced their output and inventories, bringing down the index of industrial production (IIP) in June (-0.3%) and July (0.9%).

Economists say the gradual recovery will only lead to a tepid improvement in economic growth in the second quarter (July-September), after gross domestic product (GDP) growth decelerated to 5.7% in the quarter ended June, the slowest pace in three years.

Crisil Ltd chief economist D.K. Joshi said GDP growth will pick up in the second quarter, mostly because of a positive base effect. The pruning of GST rates on many items on Friday may reduce compliance costs in many sectors, increasing efficiency and in turn output growth, he added. .

During September, the manufacturing sector recorded 3.4% growth, the same as that of electricity, while mining output picked up significantly to grow 7.9%.

Capital goods production, which indicates investment demand in the economy, also grew for the second consecutive month in September, by 7.4%.

However, output of consumer durable goods contracted 4.8%, which indicates that expectations of a festive season boost to demand were belied.

As the kharif (summer crop) harvest comes in, consumer demand should pick up, taking the full-year IIP increase to 4-5%, said Madan Sabnavis, chief economist at Care Ratings Ltd.

In the April-September period, the first half of the current fiscal year, IIP rose 3.8%, compared with an increase of 5% in the year-ago period.

In terms of industries, 11 out of the 23 industry groups in the manufacturing sector registered growth in September. The industry group ‘Manufacture of pharmaceuticals, medicinal, chemical and botanical products’ posted the highest growth of 26.4%. ‘Other manufacturing’ contracted 27.1%.

The Reserve Bank of India has pared its economic growth projection based on gross value added to 6.7% for 2017-18 from 7.3% estimated earlier, blaming tepid growth in foodgrain production, adverse impact of GST implementation on industries and weak consumer confidence. The central bank said economic recovery will begin as soon as the second quarter of the fiscal year.

The International Monetary Fund (IMF) also reduced its growth forecast for the Indian economy by half a percentage point to 6.7% for 2017, blaming the lingering disruptions caused by the demonetization of high-value currency notes in November 2016 and the roll out of GST on 1 July.

Both the Asian Development Bank and the Organisation for Economic Cooperation and Development have also cut their growth projections for India to 7% and 6.7%, respectively, for fiscal 2017-18..