IIP contracts, inflation rises in fresh woes
NEW DELHI: Industrial activity, as measured by the Index of Industrial Production (IIP), contracted by 3.6% in February signalling a weakness in the sequential economic recovery even before the beginning of second wave of Covid-19.
Retail inflation, as measured by the Consumer Price Index (CPI), rose to 5.5% in March, still within the Reserve Bank of India’s comfort level of 6%, although the broader number hides a surprising return of food inflation. The IIP numbers are worse than a projection by a Reuters poll of economists (3% contraction), whereas the inflation numbers are marginally higher than the 5.4% forecast. The latest IIP and CPI numbers are a continuation of the trend of a shrinking IIP in January and a rising CPI in February.
With many states imposing partial lockdowns or restrictions on movement and activities, and more considering doing the same, the economy could lose further momentum going forward. This is evident from the fall in high frequency indicators such as Nomura India Business Resumption Index (NIBRI), which fell to 90.7 in the week ending April 4.
Because economic indicators will have a favourable base effect from March, thanks to the effects of a 68-day long complete lockdown which was imposed on March 25, 2020, the growth figures from March onwards might not capture the true economic situation.
The contraction in the IIP comes on the back of a 4.6% contraction in the Index of Eight Core Sector Industries that account for 40% of the IIP basket. A sub-category wise analysis of the IIP shows that headwinds facing industrial activity were broad-based as all components except consumer durables contracted on an annual basis in February.
The contraction in non-consumer goods categories such as primary goods, capital goods, intermediate goods and infrastructure/construction goods was higher, suggesting a bearish demand outlook by manufacturers and weakness in capital expenditure in the economy.
“Production level of primary, intermediate and infrastructure goods, which breached pre-Covid-19 level in January 2021 has again slumped below it in February 2021,” said a note by Devendra Kumar Pant, chief economist, India Ratings and Research.
Retail inflation, which fell to 4.1% in January 2021, has gained 146 basis points since then to grow at 5.52% on a year-on-year basis in March. Core inflation, which measures the non-food, non-fuel component of the CPI basket, increased to 6.07%, its highest value since July 2018.
What is noteworthy, however, is a re-emergence of tailwinds on the food inflation front. Year-on-year growth in headline food inflation, which has a weight of 39% in the CPI basket, has gained 298 basis points between January and March to grow at 4.94% in March. Prices of three important food categories, namely egg, fish and meat, pulses, and edible oils continued to grow in double digits.