Consumer durables shrank for a second consecutive month, mirroring the drop in sales of automobiles, among others, and indicating a decline in urban demand.
Industrial production beat analysts’ expectations to grow at 4.3% in July from just 1.2% in the previous month, while retail inflation inched up by just 6 basis points sequentially to hit 3.21% in August, offering some comfort to policy-makers, as they struggle to spur faltering economic growth by reversing a collapse in private demand.
Data released by the Central Statistics Organisation on Thursday showed capital goods output, although notorious for volatility, contracted for a seventh straight month through July, suggesting investments were still in doldrums. Consumer durables shrank for a second consecutive month, mirroring the drop in sales of automobiles, among others, and indicating a decline in urban demand. But what augurs well for the fragile consumption story is that July’s consumer non-durables output rose 8.3%, the highest since October 2018 and compared with June’s 7.1%.
However, analysts are still guarded about predicting a meaningful recovery in consumption any time soon, and instead choose to wait until the festive season is over.
However, policymakers can draw some comfort from the fact that manufacturing grew 4.2% in July even on an unfavourable base (it had grown 7% in July 2018). Mining rose 4.9% in July, against 3.4% a year earlier, while electricity growth touched 4.8%, compared with 6.6% in the same period last year. Given that economic growth has plunged to a six-year low of 5% in the June quarter and inflation remains below the Reserve Bank of India’s (RBI’s) target of 4% for thirteen months in a row, some analysts expect another rate cut by the monetary policy committee in its next meeting in October. The MPC has already trimmed the benchmark lending rate by a total of 110 basis points in four rounds in 2019.
Food inflation, although still under 3%, has witnessed consistent rise since December last year and is expected to inch up further in the coming months, partly due to unfavourable base effect. Deflation/subdued food inflation has blunted the negative impact of sticky core inflation on the headline CPI since early 2018.
Aditi Nayar, principal economist at ICRA, said while the late surge in monsoon rains has substantially narrowed the gap in kharif sowing with the last year’s level, the flooding in certain areas has led to a continued rise in the prices of vegetables such as onions. “This, in conjunction with an unfavourable base effect, is likely to contribute to a hardening of food inflation in the ongoing months,” she said. “We continue to expect the MPC to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth,” she added.
DK Pant, chief economist at India Ratings, said continued double digit growth of intermediate goods growth in last three months and 3.5% growth in primary goods in July give the impression of a minor industrial recovery in coming months. “However, it will be too early to term this as recovery and one has to wait for some more time and completion of forthcoming festive season to judge whether the industrial recovery is there for real. In the past we had seen the pattern of some industrial revival and then collapse in industrial recovery.”