India’s factory output in May grew by a much slower 5.6%, latest data showed on Tuesday, mirroring signs of an imminent industrial slowdown as rising input costs and costlier borrowing squeeze corporate profitability.
The manufacturing sector, which accounts for 80% of the Index of Industrial Production (IIP), also grew by 5.6%.
Worse, the April growth was revised down to 5.7% from 6.3% earlier as policy makers face a dilemma: a slew of fiscal and monetary measures have not tamed prices, but hit growth.
Finance minister Pranab Mukherjee termed latest industrial output data as “not encouraging”. “It (the Index of Industrial Production) is not encouraging,” he said on the sidelines of a meet organised by Nabard here.
A slower manufacturing sector growth will hurt corporate profitability and employment prospects in India’s approximately 160,000 factories in India that employ an estimated 110 million people factories.
The early signs appear ominous. Investments in new projects by Indian industry at R2,66,453 crore was the lowest in seven quarters during January to March quarter — the latest for which data was available.
The Reserve Bank of India (RBI), which will present quarterly monetary policy review on July 26, has raised the repo rate, the rate at which banks borrow from RBI, by 10 times in the past 16 months to cool prices.
{{/usCountry}}The Reserve Bank of India (RBI), which will present quarterly monetary policy review on July 26, has raised the repo rate, the rate at which banks borrow from RBI, by 10 times in the past 16 months to cool prices.
{{/usCountry}}A higher repo raises banks’ borrowing costs, which in turn would raise interest rate on final home, auto and corporate loans.
Inflation rate is galloping towards double digits -- it was 9.06% in May – and economists expect it to rise further after factoring in the hike in fuel prices announced last month.
Economists expect the RBI to raise rates further. “We continue to expect RBI to move its policy rates higher by 0.25 percentage points in the July 26 review,” said Indranil Pan, chief economist, Kotak Mahindra Bank.