Sluggish growth in consumer goods and manufacturing sectors and higher interest rates are likely to keep pressure on factory output, which is likely to contract by up to 1.5 per cent in January, according to a report.
"The sustained decline in the consumer goods sector along with dismal performance of the overall manufacturing sector and soaring interest rates are likely to keep the index of industrial production (IIP) growth restrained going ahead," research firm Dun & Bradstreet said in a report today.
D&B sees January IIP to decline by 0.5-1.5 per cent. Last month the factory output, as measured in terms of the index of industrial production (IIP), had contracted by 0.6 per cent.
"The economy is facing its worst downturn with IIP contracting for the third consecutive month in December, highlighting sustained sluggishness in demand conditions and downturn in investment activity.
"Even as cyclical headwinds have eased of late, mainly on the external front, the domestic macro-environment remains challenging given rising interest rates, elevated inflation and weak consumption demand," agency's senior economist Arun Singh said.
The report said although inflation in food and primary articles has moderated in the last few months on account of seasonal factors, elevated fuel prices and weak rupee are an area of concern.
"Given the imminent increase in energy prices and currency pressures, a meaningful reduction in inflation appears unlikely in the near term," Singh said.
However, the report sees inflation remaining in the range of 4.8-5 per cent in February.
Wholesale price-based inflation eased to a seven-month low of 5.05 per cent in January, on decline in prices of food articles. It was 6.16 per cent in December.
"We still remain underinvested in farm supply chain, indicating that moderation in inflation for food articles can be a temporary phenomenon," Singh said.
Given the cut back on government spending, tight liquidity condition and higher policy rates, both short-term and long-term yields are likely to remain elevated, the report said.
Singh said the slowdown in potential growth can be reversed with effective and speedier policy reforms aimed at resolving supply chain inefficiencies and addressing structural hurdles to growth.
However, with general elections due in April-May, a sharp uptick in investment is unlikely in the near term as firms may delay their investment decisions as they await greater clarity on any changes in policy decisions or new policy formulations by the next government, he said.