Factory output likely rose 1.8 pct yy in May

INDIA-FACTORY-OUTPUT-PREVIEW:Factory output likely rose 1.8 pct yy in May

bangalore  July 10, 2012, 12:19 IST

bangalore  07 10, 2012, 12:30 IST

 

India's industrial output accelerated to a modest pace in May on an annual basis from barely any growth at all in April, held back by deep contractions in capital goods, a sign that the pace of overall economic growth remains weak.

A Reuters poll of 30 economists conducted between July 2-9 showed India's Index of Industrial Production (IIP) picked up to 1.8 percent from 0.1 percent in April. Forecasts ranged from no growth to a rise of 4.8 percent.

That consensus forecast is well below the average of around 9 percent annual growth in industrial output each month before Asia's third largest economy began to slow down in the second half of last year.

That suggests more economic weakness ahead, after the economy grew at the slowest pace in nine years in the quarter to March on a year earlier, just 5.3 percent.

"Slowing industrial production will impact (the) services sector with some time lag and in turn shows the overall economy is going to be subdued," said Arun Singh, senior economist at Dun & Bradstreet.

Although no respondents in the poll expected a contraction in factory output, the volatile nature of the data and the usual sharp revisions to past months could spring some surprises. Industrial production makes up about 15 percent of Indian GDP.

"Industrial output is going to continue to be on the lower side and will be choppy going ahead as a result of relatively higher base-year effects," said Madan Sabnavis, chief economist at Care Ratings, referring to stronger growth last year.

A private survey of purchasing managers suggested India's factory sector kept up a steady but modest expansion in May.

Infrastructure output, which accounts for over a third of factory output, grew an annual 3.8 percent in May, faster than the revised 3.1 percent in April.

However, four of the eight core industries in the infrastructure sector contracted in May and economists said that could weigh on the overall output numbers.

"The industrial output is likely to remain subdued going ahead, led by a slack in investment activity owing to the elevated input costs and interest rates," Singh added.

Indeed, capital goods, a key investment indicator, has risen only once in the last eight months, the biggest drag on the overall index.

High input costs and the resulting stubborn rate of inflation prompted the Reserve Bank of India to unexpectedly leave policy rates unchanged last month.

That pushed the onus back on the government to revive growth through fiscal measures.

Economists were quick to scale back their rate cut expectations in a snap poll conducted after that decision and now expect the benchmark repo rate to remain constant at 8 percent through the third quarter, compared to the 7.50 percent seen earlier.