IIP sees mild recovery, but inflation quickens
CPI inflation rises for second straight month, dampening hopes for an RBI rate cut, even as GST weighs on IIP growth
India’s retail inflation quickened in August to a five-month high, virtually ruling out another rate cut by the central bank in next month’s monetary policy review. Factory output recovered moderately in July as companies continued to absorb the disruption caused by the introduction of the goods and services tax (GST).
Data released by the Central Statistics Office showed retail inflation accelerated for the second consecutive month, to 3.36% from 2.36% a month ago, as food price inflation (1.52%) advanced after three months of contraction; fruit and vegetables prices jumped by 5.29% and 6.16%, respectively, in August.
India’s gross domestic product growth (GDP) slowed to 5.7% in the quarter ended June because of disruptions in the economy caused ahead of the introduction of GST and in the aftermath of demonetization of highvalue banknotes in November.
Sunil Sinha, principal economist at India Ratings and Research Pvt. Ltd, said that despite the dismal first-quarter GDP growth and weak Index of Industrial Production (IIP) growth numbers, the Reserve Bank of India (RBI) is unlikely to cut rates in its 4 October monetary policy review.
“Though both consumption and investment demand are weak, fiscal and monetary space is quite limited and therefore the pickup in growth is going to be a fairly slow and drawn-out process, notwithstanding the encouraging first month GST collections,” he said.
IIP grew 1.2% in July, compared with a contraction of 0.2% a month ago. While the manufacturing sector was almost stagnant, growing by 0.1%, the mining and electricity sectors grew at a brisk pace of 4.8% and 6.5% respectively, in July.
In terms of industries, output in 15 out of 23 industry groups in the manufacturing sector contracted in July, signalling pervasive weakness in the sector.
Aditi Nayar, principal economist at ICRA Ltd, said the pace of IIP growth was weaker than expected. “Given the favourable base effect and the expected rebuilding of inventories prior to the festive season, we expect the IIP growth to improve in August,” she added.
Electricity, mining, hot rolled steel coils and sheets of mild steel and two wheelers were the main contributors to July IIP.
Tobacco products, diesel, bulk drugs, printing machinery and electrical apparatus were the laggards.
Barring May, the output of consumer durables has contracted in all months so far in this calendar year. Production of consumer non-durables continued to register positive growth. Production of capital goods, which represents investment demand in the economy, continued to remain in negative territory.
RBI, which cut its repo rate by 0.25 percentage points last month, retained its neutral policy stance, citing uncertainty on the future trajectory of inflation because of several factors.
“If states choose to implement salary and allowance increases similar to the centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months. Also, high frequency indicators suggest that price pressures are building up in vegetables and animal proteins in the near months,” it added.
One basis point is one-hundredth of a percentage point.
The second volume of the Economic Survey 2016-17, presented in Parliament last month, took a contrarian view and maintained that India is undergoing a structural shift towards low inflation, mostly due to changing dynamics in the oil market, which has capped upside risks.
“More recently such shifts seem to have been missed, for example, in the last 14 quarters, inflation has been overestimated by more than 100 bps (basis points) in six quarters with an average error of 180 bps,” it said.