- IIP data shows an unexpected hike
- Experts were predicting a lower number but it turned out to be a pleasant surprise
- Manufacturing shows uptick
- While inflation, poor monsoon pose risks, India’s economy may weather this storm
Amid continued mayhem at the stock market, the Indian economy gave the first sign of a recovery on June 12 with factory production measured on Index of Industrial Production (IIP) growing by 4.1% in April as against 3.7% in the same period in 2014. In the preceding month, IIP grew by a modest 2.5%.
The better than expected IIP data has flummoxed the economy watchers as most of the poll conducted on the eve of the data release had pegged the IIP growth figure at less than 2%.
The IIP data shows that manufacturing output that makes for three fourth of the IIP index rose sharply by 5.1 percent April as against 3 percent in the corresponding period in the last year.
Still demand still remained suppressed for industrial goods as the production of capital goods grew by 11.1% in April in comparison to 13.4% in the same month last year. The breakup shows that 16 out of the 22 industry groups in the manufacturing sector showed positive traction in April when compared with the corresponding period last year.
However, all is still not well. The retail inflation figure, which is measured by the Consumer Price Index, inched up to 5.01 percent in May as against sub-five percent level in April. This is the first time in four months that the retail inflation showed an upward move.
In the half yearly policy review on June 2, Reserve bank of India Governor Raghuram Rajan had said CPI inflation could rise up to rise to 6% by January.
Reacting to the positive IIP data, Investment Information and Credit Rating Agency of India Limited (IICRA)said:
“The marginal uptick in CPI is in line with our expectations, given the considerable upward revision in fuel prices during that month”.
“Following the rate cut in the June…We expect an extended pause until the extent of the monsoon shortfall and its impact on food inflation become clear.”
Federation of indian Chambers of Commerce and Industry (FICCI) President Jyotsna Suri also felt that the IIP data mar the beginning recovery in the economy. He said the diversified nature of manufacturing growth shows that the economy is gaining momentum now.
Director General of Confederation of India Industry (CII) Chandrajit Banerjee said, “The strong output performance of industry is an indication that recovery is firmly taking roots and turnaround in the investment cycle is imminent.”
Even before the relapse of the IIP data, Finance minister Arun Jaitley sounded highly optimistic about recovery in the India economy, saying the basic fiscal data looks good and the economy is on a roadmap for much higher growth. Jaitley was speaking to reporters after meeting with the heads of Public Sector and Private Sector banks, who were asked to pass the benefit of .75% rate cut carried out by the RBI in the last six months.
“The Finance Minister asked the CEOs of both the public and private banks to effect a corresponding rate cut of 75 basis points in response to RBI rate cut of same basis points since January. All banks unanimously expressed that in a period of 2 to 3 months, greater transmission of lower rates could be seen”.
– Finance Ministry statement
It is not often that private sector banks are issued such direction by the Government. Jaitley had summoned the chief of top private banks such a ICICI, HDFC and Axis after his meeting with PSU heads.
The heads of the banks, sources said, pointed to the finance minister that high interest rate on deposits and their leveraged balance sheet that is crying for additional fund for re-capitalization are the factors that have prevented them passing on the benefits of the interest rate cut.
“Banks have made a strong case for additional capital… And over the next few months, this is something the government is going to seriously look at… I do believe it’s a case which has merit (attention)”.
– Arun Jaitley, Finance Minister
The government had provided Rs 7,940 crores ($1.24 billion) in the Budget for recapitalization of PSU banks for the current fiscal. But this amount has fallen short of the requirement. On June 11, the RBI had written to the finance ministry to provide additional fund to clean up the books of the PSU bank.
For this article, the exchange rate used is 1 US Dollar = 63.92 rupees
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