Industrial growth contracted unexpectedly in February while consumer inflation quickened to a five-month high in March, a double setback for the Indian economy as it enters the new financial year.
Industrial production shrank 1.2% in February against a 3.3% rise in January, data released by the statistics office showed. Consumer inflation accelerated to 3.81% in March largely due to increased fuel prices, according to data separately released by the department.
The Reserve Bank of India last week kept interest rates unchanged citing inflation risks. Experts see price volatility as a looming threat although newer data suggest industrial growth should improve.
Industrial growth came in below the consensus expectation of an increase of more than 1%.
The decline was broad-based with manufacturing contracting 2%, mining reporting a 3.3% rise in February and electricity generation stagnant at 0.3%.
Production of capital goods declined 3.4%, highlighting the continued weakness in investment activity. Consumer goods output fell 5.6% with durables production contracting 0.6% and non-durables reporting an 8.6% decline.
Overall, industrial growth for the April-February period was 0.4%. The Indian economy is forecast to grow 7.1% in 2016-17 compared with 7.9% in 2015-16.
Kotak Mahindra Bank’s senior economist Upasna Bhardwaj noted that weak factory output in February continues to point toward the fact that the demonetisation led disruption to economic activity was yet to be arrested. “Besides sugar, cement is the biggest negative contributor suggesting that construction linked activity has been hit and the impact has not yet faded,” she explained.
Still, data for March shows industrial growth could pick up in the last month of FY17.
“Early indicators like ATF (aviation turbine fuel) and petrol consumption, coal and automobile output, electricity generation and cargo handling at major ports look buoyant for March 2017,” said Aditi Nayar, principal economist at ICRA. The automobile sector also reported a strong performance in March.
Growth remains fragile in manufacturing and needs continued efforts to make the sector competitive, the Federation of Indian Chambers of Commerce and Industry (FICCI) said in a release.
INFLATION WORRY
Retail fuel inflation accelerated to 5.56% in March from 3.90% a month ago, driving overall consumer inflation higher.
Food and beverage inflation was marginally higher at 2.54% in March against 2.46% in February. A weaker-than-normal June-September monsoon would put pressure on food prices.
Inflation is expected to average around 4.5% in the first half and 5% in the second half of this fiscal, RBI had said while holding interest rates. It raised the reverse repo to suck out excess liquidity in the banking system.
“Though rupee appreciation will make imports cheaper and offset any rises in global prices, inflation faces monsoon-related risks… It is important to watch it, especially because core inflation is sticky,” said DK Joshi, chief economist at CRISIL. “We expect retail inflation to go up and be 5% in 2017-18.”
CARE Ratings said that the worrisome feature is that non-food components still witnessed high rates: clothing 4.6%, fuel and light 5.6%, housing 5%, transport 6%. “Hence, core CPI is a worry.”
India adopted an inflation target of 4% last year for a five-year period with a 2 percentage point tolerance band on either side