With inflation rates falling to new multi-month lows, all eyes are now on the Reserve Bank of India (RBI) for signals on lending rate cuts to aid budding signs of recovery.
India’s wholesale inflation rate grew at its slowest pace in five months at 5.43% in June, while retail inflation at 7.31% was the lowest in 30-months.
Experts, however, said the time to open the bubbly may still be a few months away.
“The decline in inflation recorded in June can be viewed as being temporary,” credit rating and research firm CARE Ratings said in a report. “Deficient monsoon could potentially push up food prices in the ensuing month. Added to this is the risk associated with a rise in fuel prices due to the ongoing political tensions in the oil-producing regions of West Asia. Easing of interest rates by the RBI is some time away,” it said.
Business leaders have been demanding a cut in borrowing costs to spur investments amid incipient signs of industrial revival. Factory output grew by 4.7% in May — the fastest in 19 months — rekindling hopes of a rebound buoyed by a robust manufacturing sector. Factory output had contracted by 2.5% a year ago. It grew by 3.4% in April this year.
Capital goods output, a broad gauge to measure investment activity, grew by 4.5% in May, against a contraction of 3.7% a year ago, in signs that companies are adding new capacities.
Manufacturing, which constitutes over 75% of the index of industrial production grew 4.8% in May compared to a decline in output by 3.2% a year ago.
Finance minister Arun Jaitley, in his maiden budget on Thursday, has announced measures including capital support and tax breaks for small industries amid hopes that these would breathe life into the waning industrial sector and spin jobs.
The pick-up in industrial activity comes at the time when the new government has indicated its intention to revive the industry, with specific focus on sectors and job creation. The budget provided a glimpse of this with significant support provided to sectors such as textiles, footwear, food processing, construction, and tourism, all of which are highly labour-intensive, credit rating firm Crisil said in a report.
“In addition, the support assured to the micro, small and medium enterprises is also welcome, given that nearly half of total manufacturing output is currently generated by this sector. These include, the setting up of a Rs. 100-billion venture capital fund to encourage entrepreneurship, putting in place a legal framework for easy exit for SMEs, revision of the definition of MSME to provide higher capital ceiling, and an amendment of the Apprenticeship Act,” it said.
“The budget has made an attempt to address some of the structural issues facing agriculture. There is a proposal to set up a price stabilisation fund with a corpus of Rs. 500 crore and start PM’s irrigation scheme,” said Devendra Pant of India Ratings.