Industrial production soared in April and May while inflation eased a little raising expectations that the present government will deliver on its promises, reports Team IFM
New Delhi, June 17: India’s industrial production for April soared 3.4 percent over its year-ago levels, government data showed on Thursday beating market forecasts in what could be another positive sign for the Narendra Modi government which is committed to pulling up the sagging economy.
Separate data released the same day showed that consumer price inflation had gone down to 8.28 percent in May from 8.59 percent in April year-on-year.
A Reuters polling of analysts put growth in industrial output in April at 1.9 percent after two straight months of fall, with March witnessing a provisional 0.5 percent shortfall in production.
Production grew 3.4 percent year-on-year in April after contracting for the past two months, driven mainly by increases in the manufacturing, mining and power sectors, the data showed.
Manufacturing grew 2.6 percent while capital goods output such as plant equipment, a harbinger of future investment, increased 15.7 percent.
“Today’s figures on Indian industry were the most positive in many months,” Reuters quoted chief Asia economist Mark Williams from Capital Economics as writing in a note.
This is certainly going to warm the cockles of the heart of the newly-elected right wing Indian Prime Minister Modi, who has come to power with a promise to give an effective push to the sluggish economy growing at under 5 percent.
In the capital’s political circles the surge in the infrastructure sector is being seen as key to a wider revival, much on the lines of Modi’s thinking.
The latest figures beat forecasts of 1.9 percent growth, but analysts expressed a note of caution as these volatile data could hardly be a conclusive evidence of the economy turning a corner.
In a boost for the new government, figures released on Wednesday showed India’s exports jumped to a six-month high.
NAGGING WORRY
Behind the good news is the nagging worry that consumer price inflation still remains among the highest globally even though separate figures released on Thursday showed it had cooled to 8.28 percent in May from 8.59 percent in April year-on-year.
Cooler food prices probably helped ease consumer price inflation, according to the Reuters poll.
Food inflation fell slightly to 9.56 percent in May from 9.66 percent in April.
The figures give central bank chief Raghuram Rajan minimal scope to cut rates to pep up the economy. Rajan has insisted that curbing inflation is key to a sustained economic recovery.
Consumer price inflation has been averaging nearly 10 percent for the past two years even though economic growth has been stuck in a low gear, growing by 4.7 percent year-on-year in the 12 months to March 2014, marking the longest slowdown in more than a quarter of a century.
The government has prioritised curbing food costs, part of a sweeping agenda that also seeks to revive economic growth from a near decade low. As it is, it has a good stock of staples such as rice, wheat and sugar collected from bumper harvests in the last few years, but it has limited means to control surges in prices of fruits and vegetables that have the largest impact on food inflation.
The central bank signalled this month that it could ease monetary policy if inflation slowed faster than anticipated, a scenario that faces risks from potentially weak monsoon rains that may hurt crop production.
The met office has cut its rainfall prediction saying monsoon showers that irrigate 55 percent of the nation’s farmland will be below normal as an El Nino pattern emerges.
Consumer inflation could slow to less than 6.5 percent if the monsoons are close to normal, while a drought could push the rate into double digits, Bloomberg said quoting Standard Chartered Plc estimates.
Lacklustre industrial performance characterises India’s growth struggle. Output contracted 0.1 percent in the fiscal year to end-March. It has eased in four of the past six months.
Thursday’s economic data, which show an uptick in industrial activity and easing of inflation, are likely to cheer up Prime Minister Modi who also aims to debottleneck the supply chain for easier availability of food that would ultimately keep prices of essentials in check.
“Both IIP and CPI have pleasantly surprised [us]. Production activity may get supported with robust export growth. Additionally, expediting stalled projects and improved business sentiments recently should act as a catalyst in reviving the capital expenditure cycle,” Reuters quoted Upasana Bhardwaj, economist ING Vyasa Bank, Mumbai as saying.
INFRASTRUCTURE PUSH
The Modi government is looking to revive the economy through higher investment in infrastructure, which is expected to boost demand in sectors such as cement, steel and power. It is also aiming to simplify approvals for projects to kick-start capital investments.
The economic slowdown is telling on public finances. The federal tax-to-GDP ratio has slipped to 10.2 percent from a peak of 12.5 percent in 2007/08, leaving the government no option but to resort to more rupee bond sales to fund spending commitments.
Higher investment spending without adjustments in wasteful public expenditure would make it tougher to trim the fiscal deficit to a targeted 4.1 percent of GDP this fiscal year, resulting in a heavy bond supply and increased cost of credit for corporates.
This could worsen India’s struggle with persistently high inflation– on top of the forecasts of below-average monsoon rains.
Reuters quoted Radhika Rao, economist at DBS Bank, as saying that a revival in manufacturing and investment would have broad multiplier effects across the economy, but she cautioned that an expected shortfall in monsoon rains could impact both demand and inflation.
Expectations of an economic turnaround after the formation of the Modi government have triggered copious capital inflows, sending up the total value of the Indian stock market to more than US$1.5 trillion for the first time.
Other recent data also gives some hope for a revival. Merchandise exports posted their fastest growth in six months in May. The services sector expanded for the first time in nearly a year last month.
Improving consumer sentiment helped car sales post their first annual growth in three months in May.