Industrial production grew just 3.2% in May, the slowest in seven months, while retail inflation jumped to a five-month high of 5% in June, in a double whammy for the economy.
Industrial production grew just 3.2% in May, the slowest in seven months, while retail inflation jumped to a five-month high of 5% in June, in a double whammy for the economy. Importantly, core retail inflation jumped to a 47-month high of 6.4% in June, raising chances of another rate hike by the monetary policy committee (MPC) in the coming months (the MPC last hiked the repo rate by 25 basis points in June, after a gap of over four years). That both the slowdown in industrial output growth and jump in price pressure are somewhat broad-based add to the worries of policymakers who are already concerned about sticky global oil prices.
Manufacturing growth almost halved sequentially from 5.3% in April to just 2.8% in May, although mining and electricity recorded some improvement, thus preventing the overall industrial expansion from sliding further. Similarly, although food inflation moderated by almost 20 basis points sequentially in June to 2.91%, a rise in prices of some farm items so far this month and the announcement of high minimum support prices (MSPs) for certain crops could weigh on food inflation in the coming months.
“The impact of higher MSPs on inflation and fiscal risks and a string of expenditure announcements by state governments such as the recent crop loan waiver by Karnataka, have resulted in upside risks to the inflation trajectory for the remainder of FY2019, notwithstanding a favourable base effect and the recent dip in crude oil prices,” said Aditi Nayar, principal economist at Icra. Such factors, in conjunction with the rise in core inflation in June, suggest a high probability of a repo rate hike in the August policy itself, she added.
Capital goods, although notorious for volatility, grew 7.6% in May, slower than 11.2% in the previous month. Importantly, non-durables output contracted in May (-2.6%) for the first time since December 2016, and consumer durables witnessed a slower growth sequentially. This suggests private demand is yet to see a sustained recovery, especially in rural areas most of which were hit by farm distress. The data also heightened the fear that an industrial recovery might barely have materialised as yet.
Sunil Kumar Sinha, principal economist at India Ratings & Research, said a glance over the data of past few months indicate that factory output growth has been declining in each successive months since November 2017, barring April 2018. The more disappointing part of the unfolding factory output story is weakness in manufacturing sector, he added.