The 1.8 percent contraction in the industrial production is a shocker, highlighting the challenge for new finance minister P Chidambaram to reverse the nation’s sharp slowdown.
“The slowdown in the economy is mainly on account of the slowdown in the industrial sector and lower growth registered in the agriculture sector,” Chidambaram told parliament in a written reply on Thursday.
The manufacturing-led slump provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week, citing the impact of a worsening drought on farming and political hurdles to economic reform.
Manufacturing output, which accounts for three-quarters of the Index of Industrial Production, was chiefly to blame, falling 3.2 percent from a year earlier in June. This was largely due to a 56% contraction in electrical machinery which has been in the red for a while reflecting the deceleration in the investment cycle. This coupled with the lack of rains suggests performance of the electricity sector is likely to be much worse in future.
“Data will pile pressure on the new finance minister to jump start the reform process and revive investment interest, which is likely to be a key drag on overall growth heading into H2,” sRadhika Rao, an economist at Forecast PTE in Singapore told Reuters.
However, a deficient rain is spoiling all chances of rate cut in the near term. “While sustained weakening in IP growth calls for policy easing, we expect WPI inflation to rise to 7.5% y-o-y in July from 7.2% in June and core WPI (non-food manufactured) inflation to inch above 5% (from 4.8%). Moreover, rising food price inflation and an impending fuel price hike should push headline WPI inflation above 8% by Q4 2012,” Nomura said in a note.
It expects now expects the central bank to cut policy rate only in the first half of 2013.
“If the month-on-month seasonally adjusted number was zero for this particular month, you would see an IIP number of about 0.7%. The fact that it is -1.8%, suggests a seasonally adjusted contraction month-on-month of about 2.5%. This means all of the gains that you saw in the May numbers have been wiped out,” analyst Sajjid Chinoy of JPMorgan told CNBC-TV 18.
However Nomura believes going forward IIP growth will move into positive territory, but remain weak due to sluggish exports, below normal monsoons, high inflation and continued government policy issues.
While there can be seasonal factors, this contraction in the manufacturing segment likely reflects continued strain on the consumption, Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities told Firstpost.
“Consumption has supported the GDP growth in the backdrop of worsening investment scenario. As far as the RBI action is concerned, we believe RBI is likely to act once there is action on the fiscal reforms side, which can alleviate supply constraints and reduce fiscal deficit,” Shah added.
Unlike other central banks which have been cutting rates to spur growth, the Reserve Bank of India (RBI) has been holding back on reducing borrowing costs, saying it wants inflation to ease first.
GDP growth too faltered to a nine-year low of 5.3 percent in the quarter ended in March, with corporate investors deterred by the high interest rates and a policy gridlock.
Reforms too have been stalled on fears of a political backlash to steps such as allowing foreign supermarkets into India, while a drought in some parts of the country makes it harder to cut fuel subsidies blamed for a widening fiscal deficit.
“The situation calls for urgent policy measures both by the RBI as well as the government to salvage industry from further decline,” Chandrajit Banerjee, director general of the Confederation of Indian Industry business group told AFP.
With inputs from Reuters