Consumer inflation slows to 2-yr low of 8.1% in February, industrial output up marginally in January

India's flagging economy delivered rare good news on Wednesday with a slight expansion of industrial production and further cooling in consumer prices, offering some respite to the ruling coalition before next month's general election.

Improved consumer demand helped industrial output expand 0.1 per cent on year in January, the first growth in four months, data from statistics ministry showed on Wednesday.

Analysts polled by Reuters had forecast a contraction of 0.6 per cent in output. The fall in December's output was revised to 0.17 per cent on year from 0.6 per cent earlier.

Separately, retail inflation eased for the third straight month to a 25-month low of 8.10 per cent in February from 8.79 per cent in the previous month on moderating vegetable prices.

"Today's data show India's beleaguered economy moving in the right direction, but still far from healthy," said Miguel Chanco, India Economist at Capital Economics in Singapore.

The data showed production of consumer goods, a proxy for consumer demand, contracted an annual 0.6 per cent in January, an improvement from a 4.7 per cent drop a month ago.

Asia's third-largest economy has been struggling to recover from a stagflation-type situation where economic growth has been stuck below 5 per cent for the past seven quarters while price continue to rise at a fast clip.

Cooling prices will offer some relief to the government headed by the Congress party, which is trailing in opinion polls ahead of the polls that begin on April 7. It is still widely expected to be defeated, in part for its failure to control inflation and revive the economy.

Inflation risk

Hail and heavy rains in the past two weeks have damaged crops, which could see food prices spike again. An uncertain outlook for this summer's monsoon rains due to the El Nino weather pattern is also worrying analysts.

"Food ... prices are going to go up again because of unseasonal rains and hail storms in some parts of the country," warned D.H. Pai Panandiker, president of RPG Foundation, a private think tank.

"It appears that food prices will start going up in the next weeks as agricultural output may suffer."

Purchasing managers indexes are already pointing to underlying inflationary risks as rising input costs last month, thanks to higher raw material prices and wage increases, forced firms to pass on them to their clients.

This is likely to keep retail inflation elevated. Retail inflation has been averaging around 10 per cent for the past two years, way above a target of 4 per cent recently proposed by a central bank panel.

In an attempt to quell price pressures, new Reserve Bank of India (RBI) chief Raghuram Rajan has raised interest rates three times since September, even though economic growth is languishing at around a decade-low of 4.5 per cent. The central bank is next due to review rates on April 1.

"Even with tepid growth and falling inflation, the Reserve Bank of India is unlikely to lose its focus on managing inflation expectations," analysts at Barclays wrote in a note after the data.

Elevated prices and a slowing economy have pressured household budgets and company profits, hitting consumer demand as well as corporate investments.

Contracting industrial output and investment growth that is on track to hit an 11-year low pulled down economic growth to a worse-than-expected 4.7 per cent in the quarter to December.

The majority of the chief executives of Indian firms expect the economic situation to remain unchanged over the next six months, a survey carried out by an industry chamber showed this week. Many firms are wary of committing fresh investments before the election outcome is known.

This leaves election spending, estimated to be as high as 0.5 per cent of gross domestic product (GDP), as the main hope for a growth uptick.

India's industrial production grew for the first time in four months in January, posting annual growth of 0.1 per cent, government data showed on Wednesday.

Analysts polled by Reuters had forecast a contraction of 0.6 per cent in output. The contraction in December's output was revised to 0.17 per cent on year from 0.6 per cent earlier.

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