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Government receives double jolt on inflation, IIP

Wednesday, 13 August 2014 - 7:20am IST | Place: Mumbai | Agency: dna

Retail inflation rose basis points in July at 7.96% while index of industrial production unexpectedly slowed 3.4%, experts term it an aberration

Index for Industrial Production (IIP) for June slowed to 3.4% as against the previous month's 4.7%, while the consumer price index inched up 50 basis points in July to 7.96% from the earlier month, according to the government data released on Tuesday.

Most market participants were expecting IIP to be above 5% as it had hit a 19-month high of 4.7% in May.

The dismal June IIP performance was largely on account of low mining output and manufacturing activities.

In terms of industries, 15 out of the 22 industry groups in the manufacturing sector showed positive growth in June as compared with the corresponding month of the previous year.

According to economists and bankers, retail inflation rose on account of high food prices in vegetables, fruits and pulses. A delayed monsoon and deficient rainfall in certain crop areas contributed to the sharp surge.

"Retail inflation is now back at the Reserve Bank of India's target of 8% for January 2015.

While the upside risks to vegetable and fruit prices persist, the strong base effect and proactive measures taken by the government to control food inflation should cap any sharp increases in inflation at least until December," ratings agency Crisil said in a statement.

According to YES Bank the increase in transport inflation on account of rail freight hike also contributed to higher headline print.

On IIP, most experts say the drop is an aberration and would be corrected in the near term.

Chandrajit Banerjee, director general at the Confederation of Indian Industry (CII), said: "Growth in industrial production, which has been on the ascendant for the last two months, declined on the back of sluggish performance of the manufacturing sector. However, we would like to see this as an aberration, as CII's own Business Outlook Survey and the Ascon survey are showing early signs of an industrial turnaround."

Anis Chakravarty of Deloitte, too, shared similar views.

"Capital goods showed an improvement by 23% while on the use-based classification, consumer durables contracted by 23%. Though we have seen a pickup in the order book, the number variances for these two classifications seem high. We expect some corrections in the next cycle," he said in a statement.

While the IIP data has come in lower than expectations, the performance in the first quarter has been overall positive, he said, adding there is a gradual improvement since the third quarter of the last fiscal. Mining has moved into positive territory while electricity numbers have also trended upwards, he said.

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