Factory output drops 1.8% in June Data Disappointing, Says FM | RBI May Cut Rates, Feel Economists

New Delhi: Industrial output fell for the third time in four months in June as weak manufacturing sector output weighed heavy, prompting economists to say that the central bank may ease interest rates to support growth. 

    Data released by the Central Statistics Office on Thursday showed industrial output fell 1.8% in June compared to 9.5% growth in the same month a year earlier. In May 2012, the sector rose 2.5% and in April it fell 0.9%. Highlighting the growing concern, the sector posted a 0.1% decline in production during April-June compared to a 6.9% growth in the first quarter of last financial year. The poor show by the industrial sector is expected to adversely impact the first quarter economic performance with services too impacted by the global economic slowdown. During January-March 2012, the economy grew 5.3%, the slowest pace of expansion in nine years. 
    The manufacturing sector, which accounts for nearly 76% of the index of industrial production (IIP), declined 3.2% in June compared to an 11.1% expansion in the same year-ago period. The mining sector rose a paltry 0.6% in June compared to a decline of 1.4% in the same year-ago month. 
    The electricity sector rose 8.8% compared to a growth of 8.0% in June 2011. The consumer durables sector was a bright spot, rising 9.1% in June compared to 1.6% growth in June 2011 while the consumer goods sector grew 3.5% compared to 3.1% expansion in the same year-ago period. 
    The capital goods sector, which is seen as a barometer for industrial activity, continued to show sharp volatility. The sector fell 27.9% in June compared to a hefty rise of 38.7% last year. Economists have raised doubts about the quality of data, which they say makes it difficult to predict trends. The government has promised to rework the data collection structure and methodology but so far the progress has been limited. 
    Finance minister P Chidambaram said the June IIP data was disappointing and called for focusing on the critical sectors, removing bottlenecks and giving a fillip to production. 
    Economists say the deficient monsoon rains may also impact growth. Several economists have revised downwards their growth estimates for 2012-13 and have hinted at the possibility of a sub 6% expansion. Some economistssaid the Reserve Bank of India may consider easing rates to support sliding growth. 
    "While inflation management may remain the RBI's priority, we feel that policy focus ahead would have to turn a lot more balanced between inflation and growth. Markedly subpar growth, softening in core inflation, near-zero fiscal spending headroom, and only hesitant government policy initiatives to revive the economy will eventually lead to sizeable monetary accommodation in coming months, in our view," Barclays Capital said in a note. 
    "The recent media-bytes from the new finance minister indicate his preference for somewhat softer interest rates. We feel that such preference of the finance minister can potentially influence government initiatives and the RBI policy trajectory in the coming months. In sum, the next round of rate cuts could come earlier than current market expectations," it added. Industry groups called for urgent action from the RBI and the government to revive growth. "The IIP data for June clearly points to a deepening industrial slowdown which could have a long-lasting effect on the economy," said Chandrajit Banerjee, director-general of Confederation of Indian Industry.