07/13/2015
India / GDP
India’s May industrial production came in below expectations, while the April figure also saw a downward revision. Weak demand continues to weigh on the economy.
India’s May industrial production slowed to 2.7% on-year (consensus forecast: 4.1%, DBS forecast: 3.5%), down from a revised 3.4% (previously 4.1%) in April. On a 12-month average basis, headline output has risen to 2.6% from the December quarter’s 1.5%, but – hamstrung by weak domestic and external demand – has been unable to register a stronger upturn. Consumer goods output continued its lacklustre run despite higher real incomes amid low inflation, as rural wages stagnate. If concerns over a weak monsoon materialise, this will further hurt rural consumption. Exports also remain a drag, with receipts declining 16% between January and May.
Sector-wise, manufacturing sector activity eased to 2.2% from April’s 4.2%. A rebound in electricity generation picked up part of the slack at 6% (versus April’s minus 0.5%), accompanied by a climb in mining output. On the use-based end, capital goods output moderated after a strong run in recent months. Output here rose 1.8% from April’s 6.8% and the March quarter’s 10%. This lukewarm performance dents part of the optimism over a pick-up in investment activity, while fuelling concerns that stalled projects might not be coming on line as fast as anticipated. Recent data from the Centre for Monitoring Indian Economy saw the number of new commitments fall in the March quarter, alongside a drop in the number of completed projects. Higher public sector participation is required to get the investment cycle on track, as the corporate and banking sectors are weighed down by stressed balance sheets.
June consumer price index inflation, due on Monday, is expected to inch up to 5.2% on-year from 5% the month before. On a month-on-month basis, price pressures have been building up in the past five months, with another rise of 1% on-month likely in June, underpinned by an increase in the prices of vegetables, edible oils and milk in anticipation of a deficient monsoon. The crucial southwest monsoon was off to a strong start in June, but fizzled out in early July.
Global fuel prices are off recent highs but domestic prices have yet to be adjusted. This will limit the positive pass-through to inflation, with the component’s small weightage also minimising the net impact. The fuel price index/transportation component has been trending up since bottoming out in the March quarter, with the pinch being felt from still-firm retail fuel prices and a marginally weak Indian rupee.
Overall, inflation is not off to the moon and remains well below the Reserve Bank of India’s (RBI) January 2016 target of 6%. However as base effects fade beyond August, inflation prints are likely to trend up, putting at risk the medium-term goal of 4%. The RBI is expected to keep rates on hold in August, with an eye also on the external risks of volatility in the China equity markets and the Greek funding crisis.
