Recent economic data releases in India provide gloomy reading, with industrial output stagnating and inflation again gathering pace. The overall index of industrial production (IIP) grew by a meager 0.1% in July on an annual basis, while inflation accelerated to 7.55% in August. While inflation pressures remaining strong, and until the government takes further steps to improve its fiscal position, the Reserve Bank of India (RBI) is unlikely to loosen its policy stance. We expect it to keep policy interest rates on hold at the next policy meeting, which is on 17 September.
It has been a dismal year so far for India’s industrial sector, with annual growth averaging just 0.3% in the first 7 months of the year, down from 6.9% during the same period last year. Meanwhile, the core industry segment (accounting for nearly 40% of the overall industry) grew by 1.8% in July, significantly lower than 3.8% growth in June, highlighting the inherent weakness in these sectors.
Manufacturing output (with a share of 80% in the IIP) contracted by 0.2% in July, a slight improvement compared with the 3.1% decline in June. The strength of the manufacturing sector depends heavily on the inputs from core industries, especially electricity – in the latest Annual Report published by the RBI, it was asserted that a one percentage point increase in annual growth in electricity increases the growth in manufacturing by 0.4 percentage points.
Meanwhile, mining output fell by 0.7% in July as against 0.2% growth in June. The mining sector has been plagued with political controversies over the past year, especially the recent scandal over the allocation of coal mining blocks and the opposition’s demand for the withdrawing the mining licenses. Underperformance in mining sector, in particular coal mining, coupled with a feeble monsoon has had a major negative impact on the power sector output, which grew by 2.8% in July, moderating from 8.8% growth in June. The country also suffered its worst ever power grid failure in late July, leaving the entire north, eastern and north eastern part of the country (affecting nearly 620 million people) without power for almost two days.
Capital goods production, generally considered a barometer of investment activity in the economy, contracted by 5.0% in July, following a 28.1% fall in June. High inflation and borrowing costs, coupled with a lack of reforms measures on account of policy paralysis and sustained global uncertainties have taken a severe toll on investor sentiment. The consumer goods segment also showed a dismal performance as it grew by just 0.7% in July, moderating from 4.1% in June. The moderation in consumer goods was led by a sharp slowdown in the pace of growth in output of consumer durables along with a feeble growth in the non-durable segment also suggests consumer sentiment has deteriorated.
The latest data on IIP are pretty discouraging, and put great pressure on the government and Reserve Bank of India to take prompt action to bolster sentiment. The finance minister, P Chidambaram, recently stated that the government was “intensively engaged” with industry on the constraints on industrial production. However, with inflation accelerating, and with the government recently announcing a hike in subsidised fuel prices, it is unlikely that the RBI will embark on a monetary policy loosening agenda in the coming months.