As if the rising current account deficit (CAD) and the slide in the rupee exchange rate have not been enough cause for worry in recent days, official data on Wednesday revealing a tepid industrial growth in April with no distinct signs of recovery and a higher-than-expected retail inflation in May further added to the disappointing economic environment.

Belying earlier expectations of a recovery of sorts, even if fragile, growth in factory output as measured by the Index of Industrial Production (IIP) decelerated to a dismal 2 per cent in April on account of poor show by manufacturing and mining, which have been the laggard sectors during most of the previous fiscal year.

Although the April performance is an improvement when compared to the contraction of 1.3 per cent in the same month of 2012, it also marks a slippage from the 3.4 per cent growth witnessed in March.

Moreover, the very fact that the year-on-year growth of 2 per cent during the first month of this fiscal is over a low base in negative territory, the turnaround in no way points to a robust recovery.

Alongside, while the IIP data points to the need for a rate cut by the Reserve Bank of India (RBI) during its mid-quarter policy review on June 17, the CPI (consumer price index)-based retail inflation at a higher-than-expected 9.31 per cent in May as compared to 9.39 per cent in April is likely to put the monetary authority in a dilemma on the growth-inflation dynamics. More so, when a depreciating rupee in a highly volatile exchange market is expected to render imports costlier and add more fuel to inflation.

Commenting on the ‘disappointing’ IIP data for April, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: “The growth rate that has come out on Wednesday is low...there is a slight upturn, but it’s not strong enough… the RBI is watching the situation...and I hope that they will make a sensible decision.”

As per the IIP data, the manufacturing sector, which accounts for more than 75 per cent of the index, grew by a paltry 2.8 per cent in April as compared to a 1.8 per cent contraction in the same month a year ago.

Significantly, the capital goods sector, which signals investment for fresh manufacturing capacity, witnessed a meagre one per cent growth during the month as compared to a decline in production by 21.5 per cent in April, 2012.

While the growth in power generation was even lower at 0.7 per cent in April as compared to 4.6 per cent in same month a year ago, mining output saw a contraction by 3 per cent during the month as against a 2.8 per cent decline in production in April, 2012. Expressing concern over the slow growth, while CII Director-General Chandrajit Banerjee pitched for an ‘accommodative’ policy from the RBI to stimulate investment, FICCI President Naina Lal Kidwai said: “Overall, the investment sentiment remains subdued in manufacturing and infrastructure, and unless we see speedy implementation of projects stuck due to inter-ministerial clearances, industrial growth is likely to remain moderate.”

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