Business Standard

Industrial growth, retail inflation at 17-month high

Industrial­outputgrow­sby8.4% inNov Inflationr­isesto5.2% inDec


India’s industrial output and headline retail price indices registered the highest growth since July 2016 — among the last crucial set of economic data before the Union Budget 2018-19.

The data released on Friday showed that the Index of Industrial Production (IIP), after slowing for two straight months, bounced back in November, rising by 8.4 per cent and signalling that industrial revival was back on track.

Meanwhile, the Consumer Price Index (CPI)-based inflation rate for December rose to 5.21 per cent, compared to 4.88 per cent in November and 3.41 per cent in December 2016.

The divergent trends, with robust industrial data and high inflation numbers, indicate that the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) may not go in for an interest rate cut in the foreseeabl­e future, with some analysts indicating there could even be a rate hike. Rising global oil prices not only increased fuel inflation to almost eight per cent in December, but will also make the Budget math a bit of a complicate­d exercise in these fiscally difficult times.

“A rate cut by the RBI can be ruled out; and based on the trajectory in the next few months, a rate hike could be the next rate action. But it would be the status quo in February,” said Madan Sabnavis, chief economist, CARE Ratings.

Union Finance Minister Arun Jaitley presents the 2018-19 Budget on February 1. The only two major datasets yet to be released by the Centre are monthly wholesale inflation and trade data.

IIP growth “has been driven by a combinatio­n of restocking by companies and a more vibrant demand in certain sections,” Sabnavis said.

He added that cumulative IIP growth for this fiscal year was now at 3.2 per cent, compared to the same period last year. Sabnavis expects IIP growth for the year at 4.5 per cent. IIP growth in November was fuelled by a 10.2 per cent rise in the manufactur­ing sector from the low 2.2 per cent in October. The manufactur­ing sector constitute­s more than threefourt­hs of the IIP. However, within the manufactur­ing segment, 15 of the 23 subgroups recorded a contractio­n, compared to 13 in the previous month.

Before this, industrial production growth in the country had slowed to a revised 1.99 per cent in October, from the 4.1 per cent in September, after rising to a nine-month high of 4.5 per cent in August. In November, the other major sub-sectors of electricit­y and mining rose by 3.9 per cent and 1.1 per cent, respective­ly. Capital goods production showed a rising trend for the fourth straight month. Its growth rate rose to a high 9.4 per cent from the 6.5 per cent rise in October.

It is possible that investment­s (gross fixed capital formation, or GFCF) may grow by a faster pace than what was estimated in the Advance Estimates. In the Advance Estimates, GFCF is estimated to grow at 4.5 per cent in FY18. This translates into a cumulative growth rate of 5.9 per cent in the third (Q3) and fourth quarters, up from 4.7 per cent in the second quarter (Q2). But capital goods, a principal indicator used to estimate GFCF, have grown by eight per cent in Q3 so far, up from 4.8 per cent in Q2. Thus, as capital goods maintain their trajectory, it is quite likely that Q3 estimates, which will be released in February, will show higher investment growth.

“Manufactur­ing growth is expected to remain robust in December 2017, benefiting from a favourable base effect as well as the robust expansion displayed by sectors such as automobile­s. However, the subdued performanc­e of electricit­y generation and the output of Coal India may weigh upon the growth of mining and electricit­y in December 2017,” said Aditi Nayar, principal economist with Icra.

On possible MPC action, Nayar said that unless retail inflation persisted above five per cent for two quarters, a rate hike was not expected. The RBI has been asked by the government to keep inflation at four per cent, plus or minus two per cent. The CPI inflation rate for December shot up on the back of a rise in prices of food items, eggs, and vegetables. The inflation rate for the food basket (CFPI) increased to 4.96 per cent in December, from 4.42 per cent in the preceding month. The data revealed that eggs, vegetables, and fruits became costlier, while inflation moderated in the case of cereals and pulses.

The starkest jump was for vegetables, which shot up 29 per cent year-on-year, while the steepest fall was for pulses and products, which fell 23 per cent.

Inflation in oil touched 7.9 per cent on rising crude prices internatio­nally, while house rent inflation reached 8.2 per cent on government revision of house rent allowance. Global oil prices hit $70 a barrel on Thursday, but eased on Friday. The Budget for 2017-18 had assumed global crude prices at $55, but officials say that they don’t have much of a problem if prices reach $65 a barrel.

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