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Industrial growth disappoints in June

A full-blown revival in the country’s industrial activity might be a protracted process, even as a nascent recovery is on, the Index of Industrial Production (IIP) estimates for June suggested on Tuesday. Though the index reflected an expansion in industrial output, for a third straight month, the rate of growth fell to 3.4 per cent from the previous month’s revised estimate of five per cent.

Data on retail inflation, also released on Tuesday, seems to reaffirm the Reserve Bank of India’s (RBI’s) decision to maintain the status quo on the repo rate. The inflation rate, as measured by the consumer price index, rose to 7.96 per cent in July from 7.46 per cent the previous month.

A slower expansion in industrial output in June was primarily on account of a weak show by the manufacturing sector, which has a weight of 75 per cent on the index. Manufacturing growth slowed to 1.8 per cent from five per cent in May. Of the twenty-two industries that the index is comprised of, seven registered a contraction in output during the month, compared with six in May.

On a use-based classification, capital goods production, considered a proxy for investment demand, grew 23 per cent, against 4.3 per cent in May. But growth in this sector was erratic, owing largely to data-related issues. The biggest decline was seen in the consumer goods sector, with consumer durables output declining 23.4 per cent.

Over the past year, the consumer durables segment has expanded in only one month. This appears to be in line with RBI’s consumer expectation survey, which showed the current-situation index in June was at the threshold level of March. The survey also noted that net responses on the current economic condition remained negative.

However, the survey also indicates improvement in the Future Expectations Index (FEI) due to an increase in positive perceptions on all parameters, with the exception of prices, implying there might be a pick-up in demand.

The mining sector grew 4.3 per cent, compared with 2.9 per cent the previous month. A meaningful recovery, it is believed, might warrant greater policy clarity on coal block allocations. Growth in the electricity sector, too, was erratic, with the sector growing 15.7 per cent in June, against 6.7 per cent the previous month. According to Arvind Virmani, former chief economic advisor in the finance ministry, “IIP has been at the bottom of a stretched-out U”.

One might argue better economic growth in the US and the EU would increase demand for Indian goods, providing the much-needed fillip to domestic manufacturing. But, as it stands currently, a full-blown revival in the manufacturing sector does not seem to be in sight.

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