India's
industrial output growth hit a four-month low in July while inflation remained
high, underscoring the struggle of Asia's third-largest economy to make a
sustained recovery from its longest stretch of sub-par growth in decades.
Output
from mines, utilities and factories grew by a much slower-than-expected 0.5
percent year-on-year, government data showed on Friday, down from June's
revised 3.9 percent rise.
Output
growth hit a 19-month high of 5.0 percent in May.
Retail
inflation, which the Reserve Bank of India (RBI) tracks for setting lending
rates, edged down marginally to 7.8 percent in August from 7.96 percent a month
earlier, helped by slower annual rises in prices of fuel and clothes.
The
numbers come after the economy posted its fastest growth in 2-1/2 years in the
quarter to June, helped by a revival in industry. Prime Minister Narendra Modi
seized on that figure to highlight the "huge positive sentiment"
behind India's recovery.
However,
high inflation would make it tougher for Modi to encourage Indian consumers,
who power nearly 60 percent of the economy, to loosen their purse strings. It
would also make the RBI wary of lowering interest rates later this month.
The
RBI, which wants to reduce retail inflation to 6 percent by 2016, left interest
rates steady last month, citing inflationary risks from a late monsoon.
While
better rainfall in recent weeks, falling global crude prices, moderating
vegetable prices and a favourable statistical base will likely help lower
inflation, rates are widely expected to remain on hold when the RBI reviews
them on Sept. 30.
"The
outlook on inflation seems less discomforting than it was a month back,"
says Upasna Bhardwaj, an economist at ING Vysya Bank, in Mumbai.
"We
continue to expect that RBI will keep its policy rate unchanged through fiscal
year 2014/15 (March 2015) with a probable action mid-next year."
The
prospects of a revival in demand-driven price pressures following a pick-up in
economic activity and sooner-than-expected interest rate increases in the U.S.
are also expected to weigh on the central bank's rate decision.
Any
decision by the U.S. Federal Reserve to raise rates, which have been held near
zero since December 2008, will have implications for India, as it could lead to
capital outflows, weakening the rupee and inflating costs of imported
commodities.
Modi
won India's strongest electoral mandate in 30 years in May, vowing to lift
sliding economic growth, cool inflation and create enough jobs for its young
workforce.
BULLISH INVESTORS, GLUM CONSUMERS
The optimism fanned by Modi's rise to
power has already brought inflows of nearly $14 billion of foreign funds into
Indian equities this year as investors bet that his drive to cut red tape will
revive stalled projects and underpin the economic recovery.
The 50-share Nifty has gained over 30
percent in U.S. dollar terms this year to become the best-performing equity
index in Asia. Goldman Sachs upgraded its target for the index this week,
citing optimism over future earnings of Indian firms.
To sustain this euphoria, economists say,
Modi must overhaul India's strained public finances, stringent land acquisition
laws, chaotic tax regime and rigid labour rules.
During his first 100 days in office, the
new prime minister showed little appetite for such structural changes, and
there is concern that sharply higher growth in the last quarter could reduce
their urgency.
That could be damaging for an economy that
is still hobbled by slack consumption and weak business investment.
Persistently high inflation and years of stagnant growth have forced consumers
to cut discretionary spending.
Consumer goods output, a proxy for consumer
demand, has grown in just two of the last 19 months. It fell an annual 7.4
percent in July.
Firms are shying away from fresh
investments. Capital goods production fell 3.8 percent from a year earlier.
"The pro-business government has
facilitated the investment climate and boosted confidence, but more needs to be
done to get back to a period of high growth and low inflation," said
Rohini Malkani, an analyst at Citi. http://in.reuters.com/
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