BusinessLine
Stuttering recovery: July factory output slows to 1.2%
New Delhi, September 12, 2017
Nearly six months down the fiscal year 2017-18, economic indicators continue to point to a muted recovery, watering down the government’s expectations of returning to a high growth trajectory.
Official data released on Tuesday revealed a rising trend in retail inflation even as factory output remained subdued.
The index of industrial production (IIP) grew by a mere 1.2 per cent in July as against 4.5 per cent growth in July last year.
On a cumulative basis, factory output grew by just 1.7 per cent in the first four months of this fiscal.
IIP growth for June has also been revised downwards to a negative of 0.2 per cent from a dip of 0.1 per cent.
The low expansion in July this year seems to be due to negligible growth of 0.1 per cent in the manufacturing sector that had seen low demand due to the roll out of the goods and services tax.
However, electricity generation grew by a robust 6.8 per cent in July while mining expanded by 4.8 per cent.
Food price spike
Meanwhile, retail inflation in August climbed up to 3.36 per cent from 2.36 per cent in July as many food items such as vegetables saw a spike in prices.
The consumer food price index climbed up to 1.52 per cent in August from a decline of 0.36 per cent in July.
While prices are still under control and much below the central bank’s target of four per cent, analysts believe that it may harden over the next few months.
“The CPI inflation is expected to harden further in September 2017, led by food and beverages, transport and communication, and housing, and cross four per cent by November 2017,” said Aditi Nayar, Principal Economist, ICRA, adding that factory output may also improve in August given the favourable base effect and the expected rebuilding of inventories prior to the festive season.
Expecting a turnaround in factory output in the coming months, Sunil Sinha, Principal Economist, India Ratings, said, “Both consumption and investment demand are weak. The fiscal and monetary space is quite limited and the pick-up in growth is going to be a fairly slow and drawn out process notwithstanding the encouraging first month GST collections.”
Industry is also hopeful of more rate cuts to boost demand and push up GDP growth.
According to a recent study by industry chamber Assocham and consultancy EY, the manufacturing sector needs to grow steadily at 14 per cent to 15 per cent annually over the next three decades for a sustained GDP growth of nine per cent to 10 per cent.
Compare this, with the first quarter GDP data that revealed that the economy grew at a three-year low of 5.7 per cent with manufacturing sector expansion pegged at 1.2 per cent.
The second volume of the Economic Survey has also warned of downward risks to its earlier forecast of 6.75 to 7.5 per cent GDP growth for 2017-18.
GST, note ban benefits
The Finance Ministry continues to be hopeful that the benefits of demonetisation and the roll out of the goods and services tax will increase the size of the formal economy and bring in more revenue.
But whether the gains accrue this fiscal or over the medium term is yet to be seen, though officials expect the economy to perform better in 2017-18 than last fiscal’s 7.1 per cent GDP growth.
While tax receipts have shown an improvement this fiscal, private sector data such as the Nikkei Purchasing Managers’ Index show that manufacturers and service providers have remained cautious post the implementation of GST.
A more thorough review will be undertaken towards the end of the year, when the Finance Ministry begins working on the Revised Estimates.
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