<div>India's retail inflation cooled to a record low in July and annual growth in industrial production hit a four-month high in June, bringing cheer to investors fretting that gridlock in Parliament is stalling reforms. Consumer prices rose 3.78 per cent year-on-year in July, their slowest pace on record, compared with a 4.42 per cent rise predicted by analysts. The sharp cooling, however, was in large measure due to a favourable base effect. Also, the good data could not hide the weakening investment conditions in the country, especially in the capital goods sector.<br><br>Growth in manufacturing sector is a positive development and shows that the economy is firmly on the growth path, said Finance Minister Arun Jaitley. He was commenting on the Index of Industrial Production (IIP) data, which showed that factory output grew at 3.8 per cent in June, its fastest pace in four months.</div><div><div><div> </div><div>"The growth is boosted by 4.6 per cent increase in manufacturing, while mining and electricity sectors continue to need attention," Jaitley said.</div><div> </div><div>"The growth in manufacturing lead by consumer durables and basic goods is a positive development for the economy. It shows that the economy is firmly on the growth path," he said.</div><div> </div><div>IIP figures are consistent and need to be read with the growth in indirect tax receipts, the Finance Minister said.</div><div> </div><div>Indirect tax revenue rose over 37 per cent to over Rs 2.1 lakh crore in the April-July period this year on the back of higher excise duty collections.</div><div> </div><div><div>The Finance Minister also said: "It is especially notable that simultaneously inflation has declined to 3.8 per cent, with food inflation being only 2.2 per cent."</div><div> </div></div><div>Wednesday's economic data comes as a political logjam in Parliament has stalled Prime Minister Narendra Modi's reform agenda, putting in doubt the fate of a major tax overhaul that will create one of the world's largest single markets.</div></div><div> </div><div>A crash in global commodity prices has helped inflation slip below the Reserve Bank of India's (RBI) medium-term target of 6 per cent, giving it room to cut interest rates by 75 basis points this year.</div><div> </div><div>The central bank left the policy repo rate on hold last week, leaving the door open to ease further depending on the inflation outlook.</div><div> </div><div>The latest inflation data, coupled with China's move to devalue its currency, has bolstered hopes of further monetary easing.</div><div> </div><div>"The number is a big downside surprise," said A. Prasanna, an economist at ICICI Securities Primary Dealership. "This increases chances of RBI cutting interest rate one more time in this fiscal year ending March."<br><br><div><strong>Dr Devendra Kumar Pant, Chief Economist, India Ratings & Research</strong>, said: “CPI inflation at 3.78% in July 2015 was much below the expectation and was mainly due to sharp fall in food inflation. It is contradictory to daily price data released by the government. July vegetable prices has declined by nearly 8%. This will have a favourable impact on bond pricing and increase in probability of monetary easing.</div><div> </div><div>IIP growth was led by manufacturing. Mining and electricity performed poorly in June. Consumer durable grew by 16% due to base effect (June 2014 it contracted by 23.25%). Capital goods output contracted after seven months. This points towards a weak investment conditions.”<br><br><div><strong>Chandrajit Banerjee, Director General, CII s</strong>aid that the rise in industrial production numbers, albeit moderate, at the close of the first quarter of this fiscal indicates that the industrial recovery is gathering pace based on the improved performance of the manufacturing sector. What is encouraging is the turnaround in the consumer goods particularly the consumer durables sector which has entered a positive terrain after showing negative growth last month. The rise in IIP corresponds with the surge in indirect tax collections during the month indicating some pick-up in demand in the economy.</div><div> </div><div>However, he expressed concern about the steep decline in the output of the capital goods sector which has slipped to the negative territory after showing positive growth over the last few months. This indicates that new investments are still not happening and the firming up of the investment cycle is still some distance away. The subdued growth of mining and electricity sector is also disconcerting.</div></div></div><div> </div><div><strong>Currency Concerns</strong></div><div>China's yuan has fallen almost 4 per cent in two days since the central bank announced the devaluation on Tuesday to help resuscitate a slowing economy.</div><div> </div><div>This is bad news for Indian exports, which have fallen for seven straight months. Exporters are already complaining about a relatively stronger rupee that has appreciated by 10 per cent on a real trade-weighted basis since the middle of last year.</div><div> </div><div>Indian companies are worried the yuan's devaluation will flood the local market with cheaper Chinese imports, worsening the bilateral trade deficit.</div><div> </div><div>"Along with the yuan devaluation move, I think there is a case for more (and) not less accommodation," said Jyotinder Kaur, principal economist at HDFC Bank. "The sooner the Reserve Bank of India steps on the easing pedal, the better it is."</div><div> </div><div>The RBI, however, is worried about entrenched high inflationary expectations which are feeding into higher wages and other prices.</div><div> </div><div>A central bank survey last week showed households expect consumer inflation to hit 10.1 per cent within three months.</div><div> </div><div> </div></div>
