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

Mint Asia ST - - Inside - BAY SIT R ANJAN M ISHRA

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.

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