Factory output shrinks and inflation lowers, reviving rate cut hopes

  Factory output contracted by 2.4% in July in its worst performance in eight months while retail inflation cooled to five-month low of 5.05%, reviving hopes for a rate cut by RBI to boost growth.

The official data released today showed that the retail inflation fell below the 6% level, largely on account of a slower rate of price increase in vegetables, food and beverages, from nearly a two-year high of 6.07% in July.
The latest reading of price rise, based on the consumer price index (CPI), is the lowest since March 2016 when it stood at 4.83%. In August 2015, it was 3.74%. Registering a dismal show, industrial production shrank 2.4% in July, the lowest level in eight months, due to a declining output in manufacturing and capital goods sectors.

On a cumulative basis, the factory output in April-July dropped by 0.2% compared with 3.5% growth in the year-ago period. Enthused by easing retail inflation, Economic Affairs Secretary Shaktikanta Das exuded confidence that RBI will take into account improvement in the price situation while deciding on a rate cut in its next policy review due on October 4. "With regard to the rate cut, there is a direct relationship between the inflation figures and policy rates of the Reserve Bank. So, inflation has moderated as expected. I would therefore expect RBI to take this into consideration and take its call... I'm sure they will consider all the aspects and take a call," Das told reporters here.

On the twin macroeconomic data, an industry chamber said, "We look forward to calibrated policy measures from RBI in terms of reduction in policy rates. We also look forward to increase in public investments by the government to help domestic demand revive." According to IIP data, the previous low was witnessed in November last year when the factory output shrank by 3.4%. Factory output, measured in terms of the index of industrial production (IIP), had grown by 4.3% in July last year. 

According to data, IIP growth for June was revised downwards to 1.95%, from a provisional estimate of 2.1% released last month. Referring to IIP numbers, Das said, "It is certainly a matter of concern, but let us also remember that the IIP data is a sample of 400 companies. So, they are not truly reflective of the state of affairs... the numbers which are in the negative zone... do not reflect the full picture." The official IIP data released today showed that the manufacturing sector, which constitutes over 75% of the IIP index, declined by 3.4% in July compared with 4.8% growth a year ago.

In terms of industries, 12 out of 22 industry groups in the manufacturing sector showed negative growth in July. The capital goods output registered a steep decline of 29.6% in the month against a growth of 10.1% last year. Power generation recorded a growth of 1.6% in July as against 3.5% in the same month a year ago. The mining sector grew 0.8% in July against a growth of 1.3% a year ago.

Growth in output of consumer durables decelerated to 5.9% in July, from 10.5% a year ago. The consumer non-durable goods output declined by 1.7% in July against 4.4% contraction a year before. Overall, consumer goods production recorded a growth 1.3% in July compared with 1.1% a year ago.

As per use-based classification, the growth rates in July 2016 are 2% in basic goods and 3.4% in intermediate goods over July 2015. For April-July, manufacturing sector's output showed contraction by 1.4% as against a growth of 4% a year ago. Production of capital goods, which are considered as a barometer for investment, declined 21.3% in the four-month period compared with a growth of 4.2% in year-earlier period.

According to official data, lower inflation in vegetables in August helped as the rate of price increase stood at a mere 1.02% against 14.06% in July. Food and beverage prices remained sticky as these grew 5.83% in August in comparison to 7.96% in July. However, the overall consumer food inflation in August fell to 5.91% as against 8.35% in July. Pulses roiled the scene at an inflation print of 22.01% against 27.53% in July. However, a majority of food items covered by the Ministry of Statistics and Programme Implementation (MOSPI) to measure retail inflation showed a firm trend during the month.

Elaborating on softening of retail inflation, Das said, "Last month, when the CPI number for July was released, which was 6.1%, we had said the CPI inflation will moderate and come down." He added: "This is on expected lines. The earlier rise of inflation was on account of rise in price of pulses and vegetables. Now there has been a significant moderation in pulses and vegetables. That mainly explains the inflation coming down to 5%."

Das expects inflation level to remain in a moderate zone and may go down further, depending on pulses prices, which "we are expecting to come down even further". As per the data, cereals and products turned costlier, with inflation at 4.11%. The readings for eggs came in at 9.58%, milk and products 4.36% and oil and fat 4.94%.

Among others, the rate of price rise in fruits came in at 4.46%. CPI inflation in August for the urban segment was 4.22% while that of rural areas read 5.87%.