Fac­tory out­put stages re­cov­ery

Re­tail in­fla­tion re­mains steady


Call it early signs of re­cov­ery or re-stock­ing ahead of the fes­tive sea­son, in­dus­trial out­put ex­panded to a nine-month high of 4.3 per cent in Au­gust while the con­sumer price in­dex (CPI)-based in­fla­tion rate re­mained stag­nant at 3.28 per cent in Septem­ber.

The food in­fla­tion rate de­clined to 1.25 per cent in Septem­ber from 1.52 per cent in Au­gust, while the wide­ly­tracked core in­fla­tion (in­fla­tion in man­u­fac­tur­ing items sans food prod­ucts) rate in­creased to 4.6 per cent from 4.5 per cent.

The in­dex of in­dus­trial pro­duc­tion (IIP) grew by 0.9 per cent in July af­ter de-stock­ing due to pre-goods and ser­vices tax (GST) jit­ters brought it down to (-) 0.1 per cent in June, a 48month low.

Growth in July was re­vised down­wards from the ear­lier 1.2 per cent.

It can­not be said that the IIP rose be­cause of a low base ef­fect in Au­gust be­cause the in­dex had risen by 4 per cent in the same month a year ago.

Ex­perts at­tribute the jump to re-stock­ing af­ter the GST rollout led to de-stock­ing in June and to some ex­tent in July.

“The sharp up­turn in the IIP may be in­dica­tive of a re­stock­ing ex­er­cise be­fore the com­mence­ment of the fes­tive sea­son,” says DK Joshi, chief econ­o­mist, CRISIL.

Elec­tric­ity and min­ing helped boost IIP growth in Au­gust. While min­ing rose 9.4 per cent against 4.5 per cent in July, elec­tric­ity ex­panded 8.3 per cent against 6.6 per cent.

Man­u­fac­tur­ing, which ac­counts for more than three-fourths of the IIP, re­cov­ered to 3.1 per cent in Au­gust from a con­trac­tion of 0.2 per cent in July.

This growth has al­layed fears of the GST im­pact­ing in­dus­trial pro­duc­tion to a great ex­tent. How­ever, cau­tion should be ex­er­cised in in­ter­pret­ing it as broad-based re­cov­ery be­cause 13 out of the 23 seg­ments of man­u­fac­tur­ing posted a fall in Au­gust, though this was a lit­tle bet­ter than 15 seg­ments con­tract­ing in July.

“IIP re­cov­ery is not yet broad-based,” says In­dia Rat­ings Chief Econ­o­mist Deven­dra Pant.

CARE Rat­ings Chief Econ­o­mist Madan Sab­navis says it would be nec­es­sary to see if this num­ber could be main­tained in the next three months. “Three suc­ces­sive impressive growth rates would in­di­cate a real re­cov­ery. Or else it would be more a case of the re­stock­ing im­pact of the GST ef­fect,” he said. Cu­mu­la­tive growth in over­all fac­tory out­put for April-Au­gust, the first five months of the cur­rent fi­nan­cial year, was 2.2 per cent. This is much lower than the equiv­a­lent growth of 5.9 per cent dur­ing the cor­re­spond­ing pe­riod of 2016-17.

The July and Au­gust num­bers' im­pact on the coun­try’s gross do­mes­tic prod­uct (GDP) growth in the sec­ond quar­ter would be dif­fi­cult to as­cer­tain, be­cause the IIP is an in­dex whereas GDP takes into ac­count value-added.

GDP grew by over a three-year low of 5.7 per cent in the first quar­ter of FY18.

The CPI rose 3.28 per cent in Au­gust from 2.36 in the pre­vi­ous month. So, value added could not be as high as the IIP for July and Au­gust at a broad level, but for GDP growth, the Septem­ber num­bers of in­dus­trial pro­duc­tion would be im­por­tant as well. GDP also takes into ac­count whole­sale price in­dex (WPI)-based in­fla­tion for some seg­ments. Also, the IIP does not in­clude the in­for­mal sec­tor, which would be im­por­tant for GDP as it has been af­fected more by the GST.

Aditi Na­yar of ICRA says “we ex­pect IIP growth to ease in Septem­ber rel­a­tive to the 5 per cent in Septem­ber last year”. How­ever, au­gur­ing well for com­ing months, cap­i­tal goods out­put, gen­er­ally taken as an in­di­ca­tor of in­vest­ment, rose, for the first time this fi­nan­cial year, by 5.4 per cent in Au­gust. The seg­ment man­aged to see a rise af­ter four months of con­tin­u­ous de­cline.

De­spite fears, fast-mov­ing con­sumer goods rose by al­most dou­ble the rate of 6.9 per cent in Au­gust against 3.6 per cent in the pre­vi­ous month.On the back of a ro­bust rise in the auto seg­ment, con­sumer durables ex­panded 1.6 per cent against a con­trac­tion of 3.6 per cent in July. Af­ter de­mon­eti­sa­tion, it was only the sec­ond month that this seg­ment reg­is­tered a rise on the out­put in­dex. Pri­mary goods rose 7.1 per cent in Au­gust af­ter a 2.2 per cent con­trac­tion in July.

Growth in construction goods, how­ever, cooled to 2.5 per cent from the 3.5 per cent rise in July. While the food in­fla­tion rate de­clined in Septem­ber rel­a­tive to the pre­vi­ous month, this was off­set by the con­sid­er­able rise in the in­fla­tion rate for hous­ing on the back of the HRA re­vi­sion, as well as fuel and light, and pan, tobacco and in­tox­i­cants, says Na­yar.

As a re­sult of the uptick in in­fla­tion for hous­ing, and pan, tobacco and in­tox­i­cants, the core in­fla­tion rate rose to 4.6 per cent in Septem­ber from 4.5 per cent in the pre­vi­ous month, she says. Rad­hika Rao, In­dia Econ­o­mist, DBS Bank, says the like­li­hood that un­favourable base ef­fects might take the in­fla­tion rate back to­wards 3.5-4 per cent by the end of the year low­ers the scope of a re­turn to an eas­ing pol­icy cy­cle for the time be­ing. “Risks on the fis­cal front will also con­strain the cen­tral bank,” she says.

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