IIP shoots up on low base, retail inflation eases to a three-month low

Economists say policy rate reduction unlikely

Industrial production was up 22.4 per cent in March on a low year-on-year (YoY) base against a 3.4 per cent contraction in February, the data released by the National Statistical Office showed on Wednesday.

Also retail inflation eased to a three-month low in April. As localised lockdowns intensify in the country owing to the second pandemic wave, economists caution prices will increase, dimming prospects of policy rate reduction by the monetary policy committee of the central bank.

Rising global commodity prices are expected to add to inflationary pressures, while industrial growth is expected to recede in May with economic activity increasingly getting disrupted across the country.

Inflation based on the consumer price index (CPI) moderated to 4.29 per cent in April from a four-month high of 5.52 per cent in the previous month, according to the data released by the Ministry of Statistics and Programme Implementation.

Retail inflation stood at 7.22 per cent in April last year on the back of supply-side disruption caused by national lockdown to prevent Covid-19.

Retail inflation is within the Monetary Policy Committee’s (of the central bank) medium-term inflation target range of 4 (+/-2 per cent) for the fifth straight month.

“As the lockdown base fades, we expect the CPI inflation to bounce back to an average of 5 per cent in the remainder of H1 FY22, ruling out the possibility of further rate cuts to support economic activity and sentiment … However, with the economic outlook remaining uncertain in the light of the continuing pandemic, we expect the monetary policy stance to remain accommodative for much of 2021,” said Aditi Nayar, chief economist, ICRA Ratings.

She added the continuing elevated fresh Covid-19 infections posed substantive risks to the outlook for consumer sentiment and economic activity in several Indian states.

“There is a distinct downside bias to our forecast of a 20-25 per cent GDP expansion in Q1 FY22,” added Nayar.

The cumulative contraction in the index of industrial production during April-March (2020-21) was 8.6 per cent, compared to de-growth of 0.8 per cent during the same period a year earlier, indicating that growth was tepid even before lockdown started last year. Comparing the IIP for March 2021 with March 2019 reveals a marginal contraction of 0.5 per cent.

“There are signs of de-industrialisation with output falling in two successive years,” said Madan Sabnavis, chief economist at CARE Ratings.

Manufacturing sector output, which accounts for more than 75 per cent of the index, saw growth of 25.8 per cent in March from 2.1 per cent growth in February and a contraction of 22.8 per cent a year ago. Similarly, mining, which accounts for over 14 per cent of the index, grew 6.1 per cent as compared to a 4.3 per cent contraction in February and a 1.3 per cent decline last year.

Growth in electricity generation stood at 22.5 per cent in March, as compared to a contraction of 8.2 per cent in the same month last year.

Consumer durables output witnessed the sharpest expansion of 54.9 per cent in March, from (-) 36.8 per cent last year, mainly due to low base. Capital goods output, which reflects private sector investment, grew 41.9 per cent in comparison to a (-) 38.8 per cent fall last year.

Food inflation eased to 2.02 per cent compared to 4.87 per cent in March. Rural areas witnessed higher inflation at 9.57 per cent, while cities saw 9.10 per cent inflation in food.

The Reserve Bank of India has projected an inflation rate of 5.2 per cent for the first half of the current fiscal year.

The prices of vegetables declined by 14.18 per cent in April against a 4.83 per cent fall in March. Prices of cereals fell 2.87 per cent from a 0.69 per cent decline in March.

Fruit saw its inflation rate rising to 9.81 per cent in April from 7.86 per cent in the previous month.

Meat and fish saw the rate rising to 16.68 per cent in April from 15.09 per cent in March. On the other hand, eggs saw the rate declining marginally to 10.55 per cent 10.60 per cent in March.