Analysts said the fact that poor growth in August came on the back of a favourable base (the index of industrial production (IIP) had grown just 0.4% in August 2013 as well) cast severe doubts about an expedient recovery, following euphoria over 5.7% growth in the economy in the first quarter.
Although the data marked the fifth consecutive month of expansion in the IIP, its best run in almost three years, it has been hugely aided by conducive bases, they added.
Analysts, however, pointed out some data one-offs without which the IIP growth would have looked more impressive. Citi India economist Rohini Malkani said: There were data one-offs, particularly Radio, TV and communications excluding which IIP would have printed at 2.9% in August and 3.7% in the previous month. In fact, the segment contracted 48.8% in August and 50.1% in the April-August period.
She said this could possibly be attributed to the disruption of Nokia's operations in Tamil Nadu which could also impact near-term trends.
An 11.3% drop in capital goods output, a gauge for investment, in August and the contraction in the segment in 11 of the 17 months since the beginning of the last fiscal suggests that the clearance of several projects, as claimed by the government, is yet to take off on the ground, they said.
Although fixed investments grew an impressive 11.2% in the first quarter of this fiscal, as reflected in the GDP data, analysts said that, too, came on the back of a favourable base (it had expanded just 2% a year before).
Moreover, even in the build-up to the festival season, a 6.9% drop in consumer goods output in August marking contraction in 14 out of the 17 months since last April suggested a collapse of private demand.
"Corporate India is witnessing huge idle capacity and there is no sign it would invest heavily in further capacity addition, especially when interest rates remain elevated. Growth in bank credit to industry is muted. So talks about greenshoots in the economy at this juncture seems an illusion," said Madan Sabnavis, chief economist at CARE Ratings. For a rebound in the economy, demand and investment has to grow in a sustained manner, he added.
RBIs stated willingness to "break the back of inflation" and caution ahead of the US Federal Reserve's move on raising key rates there will deter the Indian central bank from trimming the interest rates this fiscal, they added.
Moreover, the potential impact of wide-spread dry-spells on summer-sown crops, especially after the weather office predicted a 13% rainfall deficit this year, poses risks of food inflation if the government doesn't get its act together.
Although retail inflation moderated slightly in August, the consumer food price index has inched up to 9.42% last month, as against 9.36% a month before.