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India's economic growth shows little sign of recovery from five-year low

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Consumption, which contributes nearly 60% to gross domestic product, has been largely hurt by a shadow banking crisis, and that in turn has dragged growth down to a five-year low.

New Delhi

WEAKNESS in India's investment and consumption activity worsened in July, with economic growth showing little signs of recovery from a five-year low.

A gauge measuring overall activity moved one notch towards weaker territory, as six of the eight high-frequency indicators compiled by Bloomberg fell from the previous month. Car sales slumped the most in almost two decades, and latest data showed that infrastructure sector output grew at the slowest pace in more than four years.

The weakening came about a month before Finance Minister Nirmala Sitharaman announced a slew of steps to revive Asia's third-largest economy. While the measures boosted market sentiment, they are expected to fall short of spurring growth.

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The dashboard measures "animal spirits" - a term coined by British economist John Maynard Keynes to refer to investors' confidence in taking action - and uses the three-month weighted average to smooth out volatility in the single-month readings.

After contracting in June, India's purchasing managers index (PMI) for services rebounded into growth territory in July.

The index rose to 53.8 from 49.6 in June, with the upturn in business activity linked to the budget presented in early July and improved work orders. A reading above 50 indicates expansion.

Manufacturing activity also picked up, a separate PMI survey showed, pushing the composite index to an eight-month high of 53.9 in July from 50.8 in June.

Input cost inflation was muted, with only a negligible proportion of companies increasing selling prices in July. Hindustan Unilever Ltd, India's biggest consumer company, lowered prices of its top soap products citing cheaper raw material costs, the Mint newspaper reported on Tuesday.

That trend in prices should give the central bank enough leeway to pursue an easy monetary policy bias in the coming months, after having lowered benchmark rates by 110 basis points so far this year.

Merchandise exports grew in July from a year ago following a contraction in June. Still, the pace of exports growth was modest, dampened by a decline in gems and jewellery and engineering goods, and the outlook is clouded by a gloomy global economic picture and rising US-China trade tensions.

Consumer spending showed continued signs of stress. Car sales fell 36 per cent from a year earlier to 122,956 units in July, the most since December 2000, data released by the Society of Indian Automobile Manufacturers (Siam) showed. Passenger vehicle sales slumped 31 per cent, while lorry and bus sales fell 26 per cent.

Weak sales are forcing manufacturers to cut production or shutter factories temporarily, leading to at least 15,000 job losses in the industry so far, Vishnu Mathur, the director general of Siam, said.

The prospect of job losses and slowing growth saw consumer confidence drop further in July, according to a survey by the central bank.

Consumption, which contributes nearly 60 per cent to gross domestic product (GDP), has been largely hurt by a shadow banking crisis, and that in turn has dragged growth down to a five-year low.

Data due on Friday will probably show that India's GDP expanded 5.7 per cent in the quarter ended June, slower than the 5.8 per cent pace seen in the previous three months.

Sluggish consumer spending and tardy investment is keeping demand for bank loans in check. Overall credit growth was pegged at 12.2 per cent in July, down from 14.2 per cent at the beginning of April, according to central bank data.

The Citi India Financial Conditions Index, a liquidity indicator, showed that overall conditions were improving in July after remaining fairly tight in April, May and the early part of June.

India's core infrastructure industries' output, which constitutes 40 per cent of total industrial production, rose 0.2 per cent in June from a year earlier. That was the slowest pace of expansion in more than four years, as four of the eight components - crude oil, natural gas, refinery products and cement - contracted.

Industrial output growth eased to 2 per cent in June from 4.6 per cent in May, with production of consumer durables and capital goods weighing down activity. Both the numbers are reported with a one-month lag. BLOOMBERG