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.