Industrial output grew at its slowest pace in nearly nine months, dragged down by sluggish manufacturing and mining sectors, as the impact of tight interest rates set in. But economists said the Reserve Bank of India was unlikely to pause despite the moderation in growth. Data released by the Central Statistics Office showed industrial production rose a weaker-than-expected 5.6% in May compared to 8.5% in the same period a year ago. April’s growth was revised downwards to 5.8% from 6.3% prompting economists to complain about volatility in data in recent months. Cumulative industrial growth stood at 5.7% during the first two months of the current fiscal compared to 10.8% in 2010-11.
The manufacturing sector, which accounts for over 75% of industrial output, slowed to 5.6% in May compared to 8.9% in the same month a year ago. Mining rose 1.4% in May compared to 7.9% in the previous year. The capital goods sector rose 5.9% compared to 15.8% in the year-ago period. Growth in consumer goods and consumer durables remained muted. The consumer goods sector rose 5.4% in May compared to 7.4% in May 2010 while consumer durables expanded 5.2% slowing from the previous year’s 14.7%.
Finance minister Pranab Mukherjee told reporters that the factory output data was not encouraging but said the government would take steps to boost the manufacturing sector. He, however, did not elaborate on the issue. Some economists said Tuesday’s data may not have much implication for growth but it demonstrated that growth has slowed in manufacturing and mining. Most economists agreed that the May data showed clear signs of slowdown but expected growth to rebound in the second half of the fiscal year.
“So what should we make of this data? Should we wait till more revisions before settling on an interpretation? Clearly growth has slowed in recent months in manufacturing and mining, but the implication for growth may not be much from today’s data release,” Deutsche Bank economists said in a note. The RBI has raised interest 10 times in the past 15 months and is again poised to raise rates later this month and its policy is guided by stubborn inflation. Inflation hovers around 9% and is expected to hit double-digits in the coming months on the back of an increase in diesel prices. “Growth in industrial production has been moderating since early 2010 and the latest figures are unlikely to materially affect the RBI’s decision on policy rates on July 26. That call will be more affected by the WPI inflation data for June,” Rajeev Malik, economist at CLSA, said. Malik expects economic growth to decelerate to 7.5% in 2011-12 from 8.5 in 2010-11.
“We maintain our expectation of a 25 basis points hike in the repo rate to 7.75% on July 26 as the RBI will remain focused on checking inflation. However, as the moderation in growth becomes more broad-based and inflation peaks around August-September, the RBI is likely to pause once it reaches 8% on the repo rate,” Malik said.