Industrial production growth beat expectations to touch a two-month high of 4.1% in April, as manufacturing and capital goods staged a good performance, while retail inflation inched up a notch to 5.01% in May from 4.87% in the previous month, showed the official data released on Friday.

Analysts said although it was too early to pronounce a sustained rebound in investment and private demand, the growth in consumer durables output in April after 10 straight months of contractions signals a recovery in rural consumption, which was dented by unseasonal rains playing havoc with the rabi crop. The better-than-expected rise in the index of industrial production (IIP) also corroborates a 46% annual increase in the indirect tax collection in April, they said, adding that a 37% rise in the mop-up of such taxes in May also suggest enhanced industrial output in the last month.

The Reserve Bank Of India recently raised its CPI inflation forecast up by 20 bps to 6% for January 2016, significantly influenced by its higher forecast on food inflation following the prediction of a deficient monsoon season. Crisil Research has already revised its GDP growth forecast down by 50 basis points to 7.4% for 2015-16 from 7.9%. “On the demand side, we expect consumption revival to be moderate, cushioned somewhat by lower inflation and interest-rate cuts,” it said.

However, the good expansion in the IIP in April was in stark contrast with a slowdown of the core sector growth to a 18-month trough of -0.4% for the same month. The divergence between the IIP and core sector growth may be due to the fact that some of the components of the IIP that have shown good growth in recent months, such as capital goods and even consumer non-durables, are not a part of the core sector index. The core sectors make up for almost 38% of the IIP.

What is striking about the latest IIP expansion is that it came off a somewhat unfavourable base (it was up 3.7% in April 2014), while the 2.8% growth in the index in the last fiscal — the steepest since 2011-12 — was primarily due to a conducive base effect (the index had contracted 0.1% in 2013-14). However, analysts chose to await the May IIP data to see if the recovery is for real, as the relevent index had risen 5.6%, the highest in the last fiscal, posing an unenviable base effect.

However, risks to the economy still persist. Apart from the recent months’ contraction in exports, a tepid investment climate, contraction in the net sales of two-wheelers and tractors and weak growth in other auto segments, tepid credit growth and the forecast of a deficient monsoon season are the challenges before the government.

The Central Statistics Organisation has revised IIP growth for March to 2.5% from 2.1% anounced earlier.

While fluctuation is inherent in the way capital goods output growth is measured, analysts chose to wait for sustainable and healthy growth in consumer goods output before pronouncing a broad-based demand recovery. Consumer goods output, however, rose 3.1% in April, compared with -0.4% in the previous month. Consumer durables, importantly, rose 1.3% in April, compared with a revised -4.8% for March.

Manufacturing grew 5.1% in April, compared with 2.2% in March, and mining expansion hit 0.6% against 2.5% in the previous month. Power generation, however, dropped 0.5% in May, compared with 2% in the previous month, primarily due to an unfavourable base (The segment had grwon an impressive 11.9% a year before). Aditi Nayar, senior economist at ICRA, said: “The marginal uptick in CPI inflation for May 2015 is in line with our expectations, given the considerable upward revision in fuel prices during that month. Belying concerns related to unseasonal rains and a weak rabi harvest, food inflation has softened substantially from 6.8% in February 2015 to 5.1% in May 2015, offering some solace ahead of the apprehensions regarding the impact of a weak monsoon on food prices.” She and some other analysts, however, expect an extended pause until the extent of the monsoon shortfall and its impact on food inflation become clear.

Factoring in the IMD’s forecast of a 12% deficit in monsoon rainfall and the risk of increases in minimum support prices for various crops, as well as mitigants such as reservoir storage levels that are at par with the level in June 2014, ICRA forecasts the CPI inflation to average sub-5.5% in 2015.

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