NEW DELHI: Industrial production rose more gradually than expected in June but notched up positive gains for the third successive month, pointing to a slow recovery for the economy looking to shake off two years of sluggish growth, while consumer inflation accelerated faster than expected, thus rendering the prospect of interest rate cuts that much more distant.
Industrial growth slowed to 3.4 per cent in June from 5 per cent in May, while consumer prices were up 7.96 per cent in July from a year ago, data released by the statistics department showed. Inflation measured by the consumer price index (CPI) rose to 7.96 per cent in July from 7.46 per cent in June, according to a separate release by the statistics department.

The consensus was for an increase of more than 5.5 per cent in the index of industrial production (IIP) in July and a 7.6 per cent increase in the rate of inflation.

Analysts were more concerned about the spike in inflation that will surely delay rate cuts. Reserve Bank of India governor Raghuram Rajan had last week left rates unchanged citing an upward risk to inflation.

“Food inflation is solely driven by food, and maintaining inflation under 8 per cent may turn out to be a challenge,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India. The slower IIP growth wasn’t as discouraging.

“Industrial growth too disappointed as it slowed to 3.4 per cent in June after growing at 5 per cent in May. However, its overall performance in Q1FY15 is signalling a gradual recovery,” rating agency Crisil said in a note.

Despite the below-normal monsoon, all the signs still point to a likely recovery, said Shubhada Rao, chief economist, Yes Bank.

“The improving structural levers along with government’s policy measures to revive the industrial sector would also pave way for favorable growth-inflation conditions to evolve,” she said. “The improvement in leading indicators (such as auto sales, core infrastructure sector and export growth) suggests that economy is beginning to turn a corner despite subnormal monsoon.”

IIP for May was revised upwards to 5 per cent from 4.7 per cent estimated initially. The 7.3 per cent rise in the core sector index and strong car sales in June had raised hopes of industrial production gaining further momentum and lifting firstquarter GDP growth to well over 5 per cent. The number suggests consumer sentiment still remains fragile though the investment picture looks better. Production of consumer goods contracted 10 per cent in June because of a sharp 23 per cent decline in consumer durables, a measure of discretionary demand, which seems to suggest the recovery in car sales was possibly because of advance purchases in anticipation of excise benefits expiring in June.

Finance minister Arun Jaitley had in the budget extended these concessions announced in the interim budget to end of December.

Production of consumer non-durables, FMCG products, was up just 0.1 per cent. The output of capital goods, in contrast, rose 23 per cent in June, indicating some pickup in investment.

Overall, manufacturing, which makes up 75 per cent of IIP, rose only 1.8 per cent. Mining output was up 4.3 per cent while electricity generation clocked 15.7 per cent.
The Confederation of Indian Industry lobby group hoped slower June growth was an aberration, citing its own survey that showed early signs of industrial revival.

“With proper interventions in the areas of land, labour and environment norms, manufacturing can post a quick revival,” it said in a statement. The slower June IIP will temper hopes of a strong first-quarter GDP that some experts said could rise as much as 6 per cent.

In the last eight quarters, growth was in excess of 5 per cent only once. Higher consumer inflation was largely due to a spike in food inflation to 9.36 per cent in July from 8.05 per cent in June, largely because of higher vegetables prices. The government has cracked down on hoarders and imposed minimum export prices for onion and potato, measures that have had some success.

The slow start to the monsoon still poses a significant upside risk to inflation.