Industrial Growth Slows in June; Inflation a Worry

Industrial output slowed in June, though expanding for a third straight month, its best run since last September, boosting Asia's third-largest economy as it struggles to emerge from the longest spell of sub-par growth in a quarter-century.

Annual growth in output from mines, utilities and factories slowed to 3.4 percent in June from a upwardly revised 5 percent a month earlier, government data showed on Tuesday.

The data may disappoint Prime Minister Narendra Modi who won the strongest electoral mandate in 30 years in May on a promise to revive growth and control inflation.

Retail inflation, tracked by the central bank to set interest rate policy, edged up to 7.96 percent in July from 7.31 percent a month earlier, other data released on Tuesday showed. It had eased below 8 percent for the first time in 29 months in June.

Analysts said good rains in July in parts of the country could ease some pressure on food prices in coming months.

"We expect the progress in rains and sowings to ease some pressure on food prices in the months ahead, the RBI is likely to remain cautious and keep the policy rate unchanged," Upasna Bhardwaj, an economist at ING Vysya Bank, Mumbai, said referring to the central bank, the Reserve Bank of India.

Consumer food price inflation, under a new series published by the government, jumped in July to 9.36 percent from 7.97 percent the previous month.

Weak industrial production has been one of the main factors behind India's ailing growth. A fall in output during the fiscal year that ended in March resulted in the second successive year gross domestic product growth was less than 5 percent.

Annual economic growth is forecast to accelerate to about 5.5 percent in the fiscal year to March 2015 from 4.7 percent last year. Given the country's young population far faster growth is needed to provide jobs for new entrants to the labour market.

A weak start to the monsoon could also constrain growth in the farm sector, which accounts for 14 percent of the economy, while the central bank's focus on bringing down inflation prevents it from setting a more accommodative monetary policy.

The central bank wants to reduce retail inflation to 6 percent by 2016, and its governor, Raghuram Rajan, left interest rates steady last week, citing inflationary risks from the weak monsoon and volatile global crude oil prices.

With the central bank determined to tamp down price pressure, market expectations for a rate cut before the first half of next year have dampened.

SURGING PRICES

Encouragingly, the industrial production numbers came days after data showing infrastructure output growth hit a nine-month high and a survey showing that the manufacturing sector posted its fastest growth in 17 months.

An improving global economy would help boost exports and aid industry's recovery, but tension over Ukraine and the Middle East have cast a shadow over those prospects.

The lack of room for manoeuvre in monetary policy puts the onus on the new Modi government to encourage investment needed to boost growth.

Since taking office, Modi has initiated a clutch of small policy changes aimed at speeding up regulatory approvals and reducing bureaucratic discretion.

He has also sought to boost capital investment through measures such as tax breaks for power projects, and setting higher caps on foreign investment in railway infrastructure and defence manufacturing.

His government has also set in motion the first major revamp in decades of India's archaic labour laws as part of his plan to revive the economy and create millions of jobs.

Copyright: Thomson Reuters 2014