The sharp contraction in the output of capital goods as also consumer goods in July?which left the increase in factory output at a miniscule 0.5% yoy?despite a very helpful base, suggests the economy is taking far longer to bottom out than earlier anticipated. What is worse is that with consumer inflation for August coming in at a high 7.8% yoy, only slightly better than the 7.96% yoy in July?driven up by the rising prices of vegetables, at 15%-plus?there is little the central bank is likely to do by way of dropping rates, given how focused it is on taming inflation. Indeed, if the growth in the IIP in June, at 3.4% yoy, was disappointing?consumer durables had contracted sharply then, too?the July data was depressing. The sharp drop in the production of consumer durables once again is perplexing given sales of automobiles were beginning to look up; but the sector should do better now that the festive season is here.
To be sure, there are signs that the economy isn?t exactly humming with activity; the offtake of non-food credit for instance is at a four-year low and, given sanctions in FY14 dropped 32% over the previous year, demand for loans is expected to remain sluggish. Bankers say there are virtually no takers for project finance, which explains the weak capital goods numbers. How moribund the economy is shows in the sales of commercial vehicles, which have remained stagnant for several months now, and in the low levels of fleet utilisation, which have started improving only in the last couple of months but remain at around 75%.
While the anaemic manufacturing growth will no doubt weigh on the central bank, concerns on high retail inflation will outweigh those; RBI will be watching for a sustained and meaningful deceleration in food inflation?which came in at 9.16% in August, at a similar level to that in July. Fortunately, the prices of cereals have been steady and what will help rein in prices in general is the fall in global crude oil prices, currently hovering around $98 per barrel. Nevertheless, there is likely to be a prolonged pause in rates with economists suggesting it could be mid-2015 before there is any action on that front. The silver lining is that the rains have been plentiful over the last couple of weeks, bringing down the deficit to around 10-11%.