India's new
government got the best news on the economy in a year on Thursday, as
industrial growth rebounded and retail inflation dropped to a three-month low -
signs of an economic revival that could offset the threat of patchy summer
rains.
Output from
mines, utilities and factories, recovered from two straight months of
contraction to expand 3.4 percent year on year in April, its fastest pace since
March 2013, government data showed.
Growth of 1.9
percent was forecast by economists in a Reuter’s poll, after a 0.5 percent
year-on-year decline in March.
India's economy
has been dragged down by slumping industry. Industrial production shrank a
provisional 0.1 percent in the fiscal year that ended in March, keeping overall
economic growth below 5 percent for a second straight year.
Prime Minister
Narendra Modi, who took office on May 26 with the strongest parliamentary
majority in 30 years, has vowed to engineer a turnaround by stepping up
investment and clearing regulatory hurdles for businesses.
"There is
some possible improvement in the investment cycle going ahead on confidence
building," said Anjali Verma, an economist at Phillip Capital. "This
kind of data will encourage the government to take steps to boost growth."
Bureaucratic
gridlock coupled with an uncertain tax policy has stymied capital investments.
Capital goods, for example, expanded for the first time in five months in
April, posting an annual growth of 15.7 percent.
Expectations of
an investment-led economic turnaround after Modi's victory have brought in
copious capital, sending the total value of the Indian stock market over $1.5
trillion for the first time.
Thursday's
industrial production data, coming on the heels of the sharpest growth in
merchandise exports in May, are expected to further boost investor sentiment.
INFLATION EASES
Adding to the
cheer, a slower annual gain in food prices helped ease consumer price inflation
to a three-month low of 8.28 percent in May from 8.59 percent the previous
month, another government report showed on Thursday.
Persistently
high food prices have made inflation India's Achilles heel, making it tougher
for the central bank to lower lending rates even as economic growth sags.
Retail inflation
has been above 8 percent since February 2012. The Reserve Bank of India eased
rules to spur bank lending and toned down inflation rhetoric at its last policy
review, but few analysts expect it to cut rates anytime soon.
"We do not
think policymakers will be minded to loosen policy just yet," said Mark Williams,
chief Asia economist at Capital Economics.
Stubbornly high
inflation and elevated interest rates have curbed consumer demand, which powers
more than half of Asia's third-largest economy. Consumer goods output, a proxy
for consumer demand, has grown just once in the past 12 months. In April, it
contracted 5.1 percent from a year earlier.
RISKS
Modi's
government has promised to break the "vicious" cycle of high
inflation and high interest rates by reforming the agriculture market and
improving the supply chain. But those measures will take months to produce
results. Meanwhile, below-average monsoon rains look increasingly likely, which
could exacerbate price pressures.
New Delhi has
stockpiled staples such as rice, wheat and sugar from bumper harvests in the
past few years, but it has limited control over the cost of fruits and
vegetables, which has the largest impact on food inflation.
"The key
risk is ... El Nino's impact on food (prices)," said Shubhada Rao, the
chief economist at Yes Bank. She reckons bad summer rains could push up
headline retail inflation as much as 70 basis points.
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