The figure for April were also revised downward to -1.3% from -0.9% announced earlier, according to the data released by the Central Statistics Office on Wednesday.
Although industrial output growth recovered from a 1.8% contraction in June, it tumbled below a 0.5% expansion forecast by economists for July. The production shrank 0.1% in the first four months of the current fiscal, compared with a 6.1% expansion a year before. It had grown at 3.7% in July last year.
Finance minister P Chidambaram said the data revealed the economys continued disappointing performance. He, however assured that the government is intensively engaged with the industry on the constraints in production and will continue its efforts to find practical solutions. Chidambaram pointed to the mixed picture in sector-wise performance. There were gains in areas like as manufacturing and capital goods but slippages in others like electricity and consumer goods. There is no clear pattern yet, an official statement said quoting Chidambaram. While the general index for July, 2012 (over July, 2011) is positive at 0.1, it is too early to claim that this is a sign of a turn around, the statement further said.
Analysts predict weak industrial growth for August as well, as a fifth straight month of contraction in mining and uncertainty in fuel supply may upset power generation. Meanwhile, a 19% slump in car sales and the troubles at Maruti Suzuki, among others, would pressure manufacturing. This could jeopardise overall economic growth prospects in the second quarter through September unless the services sectors post massive expansion. The countrys gross domestic product (GDP) grew at 5.5% in the first quarter through June, the lowest pace in three years barring the previous quarter. Industrial output accounts for roughly 19% of the GDP.
Although policy makers remained tight-lipped about the latest IIP figures, chiefs of two large state-owned companies said the fears of a pronounced and protracted industrial slowdown might have been exaggerated. Steel Authority Of India chairman CS Verma said: India is a demand centre for steel, considering the fact that the projected investments in the infrastructure sector is $1 trillion. The steel demand has grown by 8.8% during the April-August period of this fiscal. So where is the slowdown
Bharat Heavy Electricals chairman B Prasada Rao said: We have posted an 18% growth in the first quarter. But the capital goods sector as a whole has faced some problems because of a slowdown in investments as some projects got mired in controversies. At the end of the first quarter, our order book was worth Rs 1,35,000 crore.
According to the latest data, manufacturing, which accounts for about 76% of industrial production, contracted by 0.2% in July, compared with 3.1% growth a year earlier.
What is worrisome is that only eight out of 22 industry groups (in manufacturing) have shown positive growth in July, compared with 14 groups in the previous month. This will have implications for employment too as the deceleration becomes more broad-based, said Ficci president RV Kanoria.
Fiscal deficit is leading to weak investment climate and low business sentiments, and bold announcements on reforms in areas like decontrolling diesel price are required, he said. At least an immediate 50-basis points cut in the benchmark lending rate is needed, he added.
Mining shrank by 0.7% in July, compared with 0.7% growth a year earlier. Mining had posted growth for the first time in 2012 in February following sixth consecutive months of contraction. Electricity generation gained 2.8% in July, its slowest expansion this fiscal, from 13.1% a year earlier.
A rebound (in manufacturing) is unlikely in the absence of efforts to address structural deficiencies. A combination of weak external sector, sluggish investment sentiments and moderating consumption demand will keep overall production activity subdued in the coming months. The Reserve Bank of India (RBI) will be more interested in the inflation data due on Friday, said Radhika Rao, economist at Forecast PTE, Singapore.
If inflation comes in low, and the government takes policy measures like increasing fuel prices, it could be a signal for monetary easing. Global factors like the US Federal Reserves decisions (on the third round of quantitative easing) will also influence the RBIs stance, said Rahul Bajoria, regional economist, Barclays Capital, Singapore. Analysts said a fresh stimulus by the Fed may drive up commodity prices and make RBI even more jittery about a possible flare-up in inflation.
Capital goods output a gauge for investments in July contracted by 5%, notwithstanding a low base of -13.7%. Although capital goods recovered from the worst monthly performance at least since April 2006 in June, the production has slumped in 11 out of the 16 months through July 2012, confirming a protracted slowdown despite notorious fluctuations in the overall industrial production figures.
Basic goods production rose 1.5% in July from a rather high base of 10% a year before, while intermediate goods shrank 1.1%, compared with a 0.1% slump in the same period last year. Similarly, growth in consumer durables production slowed to 1.4% in July from 9% in the corresponding period last year. Consumer non-durable goods output rose just 0.1% from 4.1% a year before. These indicate either a moderation in both urban and rural demand or supply-side bottlenecks.