India's industrial output crawls in August on slack investments, consumer demand

India's industrial output expanded at a much slower-than-expected pace in August, hobbled by weak investments and consumer demand, underscoring the challenges that face an economy battling its worst spell of sub-par growth in years. Production from mines, utilities and factories rose an annual 0.4 percent in August compared with a 2.4 percent growth estimated by economists in a Reuters poll. Output growth for July was lowered to 0.4 percent from 0.5 percent earlier.
Friday's data still marked the fifth straight month of annual expansion in output, the best run in nearly three years. However, dismal industrial figures for two straight months will make it tougher for Asia's third-largest economy to sustain the pace of recovery it showed in the April-June quarter when it grew 5.7 percent on year, its fastest pace in two-and-a-half years.
"The concern is that whatever momentum we saw in first quarter (April-June) seems to have died down in second quarter," says Samiran Chakraborty, head of research at Standard Chartered Bank. He expects growth to drop to 5 percent in the September quarter. The central bank expects the economy to grow 5.5 percent in the fiscal year ending in March 2015, and 6.3 percent the following year - higher than sub-5 percent growth in the past two years.
The faster expansion will be a big boost for Prime Minister Narendra Modi, who won the strongest electoral mandate in 30 years in May on a promise of a return to the heady growth rates of the last decade. India needs to grow at least 8 percent a year to provide jobs for the increasing numbers of youth joining the work force, and to lift millions out of poverty.
However, without an overhaul of India's strained public finances, stringent land acquisition laws, chaotic tax regime and rigid labour rules, economists say, a broader and sustained economic revival will likely remain elusive. During his first four months in office, the new prime minister showed little appetite for such structural changes. Instead, he has focussed on incremental measures to make it easier to do business.
Still, investors are euphoric. Confidence among Indian businesses is at a near four-year high, according to a survey published by industry chamber FICCI this week. However, this is yet to break investments on the ground. Capital goods production fell 11.3 percent in August from a year earlier.
"A broad-based investment revival is unlikely to set in until prevailing structural concerns are resolved," says Aditi Nayar, a senior economist at ICRA. But a lack of majority in India's upper house of parliament means some of these reforms cannot be carried out without bipartisan support. That has already delayed plans to increase foreign ownership caps in the insurance and pensions sector and revamp labour laws.
Persistently high inflation, meanwhile, has made Indian consumers wary of loosening their purse strings. Consumer goods output, a proxy for consumer demand, has grown in just two of the last 20 months. It fell an annual 6.9 percent in August. With private spending accounting for 60 percent of the economy, that bodes ill for a faster and wider turnaround.
India long has struggled with soaring prices, making it tougher for the Reserve Bank of India (RBI) to lower interest rates. Consumer price inflation is forecast to have eased to 7.2 percent in September, its lowest level since the government started releasing the data in 2012, according economists surveyed by Reuters. The poll showed wholesale prices rose 3.3 percent last month, slower than the 3.74 percent annual gain in August.
The RBI wants to reduce retail inflation to 6 percent by 2016. It left the repo interest rate steady at 8.0 percent last month and is widely expected to stand pat on rates until the April-June quarter. Even as lower global oil prices and a favourable statistical base are expected to help cut the inflation rate, there are counter-forces to consider.
Aside from prospects of a pickup in domestic consumption stoking price pressures, sub-normal monsoon rains and floods in parts of the country this year are likely to keep food inflation high. There is also a possibility that imported goods could become more expensive if the rupee weakens against the dollar, due to expectations that the US Federal Reserve could raise interest rates sooner than expected. The statistics ministry will release consumer inflation data on Monday at 1200 GMT. The data for wholesale prices is due on Tuesday at 0630 GMT.