India's new government must wrestle with weak output, inflation

Mon May 12, 2014 9:06am EDT
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By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's ailing economy showed little sign of improvement on Monday, trapped in a spell of weak growth and high inflation when the country is on the cusp of political change that is widely expected to script an economic revival.

Output from mines, utilities and factories fell for a second straight month in March, shrinking 0.5 percent from a year earlier compared with analysts' median forecast of an annual contraction of 1.5 percent, government data showed on Monday. Output had fallen a revised 1.8 percent in February.

In other data, consumer inflation accelerated to a three-month high of 8.59 percent in April from 8.31 percent in March.

Asia's third-largest economy is battling the worst slowdown since the 1980s as GDP growth has almost halved to under 5 percent in the past two years. The slowdown, however, has not cooled inflation that has been averaging nearly 10 percent for the past two years, way above the central bank's comfort zone.

Monday's data will likely put Reserve Bank of India (RBI) chief Raghuram Rajan into a quandary ahead of a policy meeting on June 3. Higher inflation readings make it tougher for him to support a flagging economy.

"There is no scope for the RBI to reduce interest rates given the sustained increase in consumer price inflation despite a favorable statistical base," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"We are looking at an extended pause in interest rates."

Coinciding with the final day of India's five-week national election, the data underscored the enormity of challenges awaiting a new government that takes over after the counting of votes on May 16.   Continued...

Reserve Bank of India (RBI) Governor Raghuram Rajan reads the bi-monthly monetary policy statement at a news conference at the RBI headquarters in Mumbai April 1, 2014. REUTERS/Danish Siddiqui