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India’s industrial production accelerates to 3.4% in April Consumer price inflation remains high

NEW DELHI, June 12, (Agencies): India’s industrial production jumped in April, beating market forecasts in another positive sign for new Prime Minister Narendra Modi who has pledged to revive the faltering economy, data showed Thursday. Output grew 3.4 percent year-on-year in April after contracting for the past two months, driven mainly by increases in the manufacturing, mining and power sectors, government data showed. Manufacturing grew 2.6 percent, while output of capital goods such as plant equipment, a harbinger of future investment, increased 15.7 percent. “Today’s figures on Indian industry were the most positive in many months,” chief Asia economist Mark Williams from Capital Economics said in a note.

Modi vaulted to power last month after a landslide election victory over the left-leaning and scandal-plagued Congress party, with a promise to reform the sluggish economy growing at under five percent.
The right-wing Modi has pledged to rebuild India’s manufacturing sector, overhaul crumbling infrastructure and bring back foreign investors. In a boost for the new government, figures released on Wednesday showed India’s exports jumped to a six-month high. The latest figures beat forecasts of around a 2.0 percent growth, but analysts expressed a note of caution. “These data are volatile though and don’t yet provide convincing evidence that the sector has finally turned a corner,” Capital Economics’ Williams said. “Meanwhile, consumer price inflation remains high.”

Separate figures Thursday showed consumer price inflation cooled to 8.28 percent in May from 8.59 percent in April year-on-year, but still among the highest rates globally. Food inflation fell slightly to 9.56 percent in May from 9.66 percent in April. The figures give the central bank’s chief Raghuram Rajan minimal scope to cut interest rates to stimulate the economy. Rajan has insisted that curbing inflation is key to a sustained economic recovery. The economy has been stuck in a low gear, growing by 4.7 percent year-on-year in the 12 months to March 2014 — the second consecutive year of sub-five percent expansion.

The change in government has sparked an investor buying spree on the Indian stock exchange, on expectations of an impending turn-around in the economy. The economic slowdown is taking a toll on public finances. The federal tax-to-GDP ratio has slipped to 10.2 percent from a peak of 12.5 percent in 2007/08, leaving the government having to resort to more rupee bond sales to fund spending commitments. Higher investment spending without adjustments in wasteful public expenditure would make it tougher to trim the fiscal deficit to a targeted 4.1 percent of GDP this fiscal year, resulting in a heavy bond supply and increased cost of credit for corporates.

This could worsen India’s struggle with persistently high inflation — on top of the forecasts of below-average monsoon rains. The government has stockpiled staples such as rice, wheat and sugar from bumper harvests in the last few years but it has limited means to control jumps in the cost of fruits and vegetables that have the largest impact on food inflation. Expectations of an economic turnaround after Modi’s victory, however, have brought in copious capital inflows, sending the total value of the Indian stock market over $1.5 trillion for the first time. Other recent data also gives some hope for a revival. Merchandise exports posted their fastest growth in six months in May. The services sector expanded for the first time in nearly a year last month. Improving consumer sentiment helped car sales post their first annual growth in three months in May.

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