New Delhi: India’s factory output grew at its fastest pace in five months at 7% in June on the back of a lower base last year due to destocking by businesses ahead of introduction of the Goods and Services Tax (GST).

The radical indirect tax reform was introduced on 1 July 2017 and disruptions continued till October. This may provide a favourable base for higher growth in the index of industrial production (IIP) in coming months.

Consumer goods, which was the worst affected sector in the run up to the introduction of GST, grew at a 21-month high of 13.1% in June while capital goods maintained a positive growth rate at 9.6% during the month. However, consumer non-durables continued their dismal performance, growing at 0.5% in June, reflecting poor rural demand conditions. This is expected to change with the India Meteorological Department (IMD) last week predicting favourable distribution of rainfall during August and September.

“Excellent numbers of IIP growth for June. IIP rises by 7%. Capital goods growth 9.6%. First quarter IIP growth stands at 5.2% with manufacturing also recording same growth. 19 out of 23 industry groups recorded positive growth with computer and electronics growth at 44%," economic affairs secretary Subhash Chandra Garg tweeted.

Excellent numbers of IIP growth for June. IIP rises by 7%. Capital goods growth 9.6%. First quarter IIP growth stands at 5.2% with manufacturing also recording same growth. 19 out of 23 industry groups recorded positive growth with computer and electronics growth at 44%. — Subhash Chandra Garg (@SecretaryDEA) August 10, 2018

However, Devendra Kumar Pant, chief economist at India Ratings and Research, said it would be too early to term the recovery broad-based. “While primary goods, one of the lead indicators of industrial growth, is exhibiting good growth and gives confidence of sustained industrial recovery, intermediate goods does not give much confidence on sustainability of the recovery," he said.

The Reserve Bank of India’s (RBI’s) 82nd round of the Industrial Outlook Survey conducted in April-June quarter showed respondents were less optimistic on demand conditions in the first quarter of 2018-19 than in the fourth quarter of 2017-18.

“In their view, the overall financial situation deteriorated slightly on account of overseas finance. However, sentiment on the availability of finance from banks and other sources remained stable. Respondents continued to perceive a drop in profit margins due to higher input (raw material) prices and rising cost of finance," RBI said.

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RBI’s six-member monetary policy committee raised policy rates by 25 basis points to 6.5% earlier this month. This is the first time since October 2013 that RBI has raised rates in consecutive meetings of its rate-setting panel.

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