The spectre of an industrial slowdown loomed large over the Indian economy after factory output fell to its lowest in six years amidst persistently rising inflation that inched to a worrisome 12 per cent mark, dashing hopes any monetary loosening to boost aggregate demand.
The latest price and industrial output data found reverberations in bourses and the benchmark BSE Sensex closed 456 points down reflecting dipping investor sentiments.
Taming inflation and maintaining robust industrial growth would remain a key priority both for the government and the Reserve Bank of India.
Economists said there were signs of investment peaking out as reflected in slower manufacturing production and capital goods output growth.
Industrial output grew by 3.8 per cent in May from 10.9 per cent a year ago and most broad sectors growing at a significantly slower clip as compared to last year.
Output was sharply less than previous month's revised 6.2 per cent.
“Investment has definitely come down during the last quarter. In June, about 15 per cent planned projects took off, compared to a normal project commencement ratio of 30 per cent,” said Yashika Singh, Head, Economic Analysis Group, Dun & Bradstreet Information Services India.
Manufacturing production grew by 3.9 per cent in May from a year-ago and capital goods output growth grew to 2.5 per cent annually, compared with a sizzling 22.4 per cent a year ago.
“Investment appear to be peaking out and I expect industrial output growth to be much lower than last year,” said DK Joshi, principal economist with credit rating and consulting firm Crisil.
Economists also saw slower industrial growth this year as the RBI grapples with policy options to conquer a runaway price line.
“Inflation is now RBI’s biggest challenge. There is a possibility that the RBI will further increase its policy rates,” said Standard & Poor’s Singapore-based Primary Credit Analyst, Takahira Ogawa.
The government, however, exuded confidence that prices would stabilise soon. “Prices of essential commodities which include food grains, pulses, edible oils, vegetables, dairy products and some other commodities including kerosene, soap safety matches have more or less stabilised,” the finance ministry said in a statement.
Analysts said the recent rise in inflation reflects both supply shocks such as higher prices for food and energy and the underlying inflationary pressures associated with a fast-growing economy.