Industrial growth slows; retail inflation at 15-month high

The Consumer Price Index (CPI)-based inflation rate rose to a 15-month high of 4.88% in November

Worrying signs surfaced on the industrial growth and inflation fronts on Tuesday, less than two weeks after the official data showed economic growth rose 6.3 per cent in the second quarter of the current financial year as against 5.7 per cent in the first. 

The Consumer Price Index (CPI)-based inflation rate rose to a 15-month high of 4.88 per cent in November, on account of rising prices of food products, particularly vegetables, and fuels. Growth in the Index of Industrial Production (IIP) declined by almost half to a three-month low of 2.2 per cent in October despite it being a festival month, from 4.1 per cent in the previous month. This showed that the restocking after the goods and services tax (GST) roll-out had not given a boost to the IIP. 

Inflation justified the Reserve Bank of India's stance of a status quo in its monetary policy review earlier this month. It had projected inflation to be in the range of 4.3-4.7 per cent in the second half of the year. 

Core inflation (after taking away food and fuel items) recorded a broad-based uptick to an eight-month high of 4.9 per cent in November from 4.6 per cent in October, said Aditi Nayar of ICRA. 

Soumya Kanti Ghosh of the SBI  group said CPI inflation would overshoot RBI's target, while GVA growth would undershoot its target of 6.7 per cent in FY'18.

IIP growth figures were revised from 3.8 per cent to 4.1 per cent in September, even though it was still less than a nine-month high of 4.5 per cent in August. 

The industrial production growth declined by more than half to 2.5 per cent in the first seven months of the current financial year, as against 5.5 per cent in the corresponding period of the previous year. 

Even as IIP growth slowed down for the third month in October, a silver lining was that capital goods production showed a rising trend for the third straight month. Its growth declined slightly to 6.8 per cent in October from 8.2 per cent in September. However, within capital goods, electrical equipment declined 15.4 per cent. 

Infrastructure and construction goods rose 5.2 per cent against 0.4 per cent in the previous month. 

Madan Sabnavis, chief economist with CARE Ratings, said the growth was limited to the infrastructure industries and capital goods (non-electrical machinery and transport goods). 

Among broader segments, growth in manufacturing, which showed a seven per cent growth in Q2 from 1.2 per cent in Q1 in the GDP data, declined to 2.5 per cent against 3.8 per cent in September. Both mining and electricity growth was also down in October from the previous month, particularly the former. 

The cut in GST rates on over 200 items might give some boost to IIP next month, while moderating inflation to an extent.   

Consumer durables production declined for the second straight month, this time by 6.9 per cent. Passenger vehicle sales lost momentum in October, with several companies posting a decline in dispatches. 

Within inflation, food inflation rose to 4.22 per cent in November from 1.9 per cent in October. The main culprit was vegetables, which saw inflation rising to 22.48 per cent from 7.47 per cent. Egg was another category that witnessed significant rise in inflation, from 0.7 per cent to 7.9 per cent.

Inflation in rent was up 7.4 per cent from 6.7 per cent. The rate of price rise in fuels moved up 7.9 per cent from 6.7 per cent.

Nayar said some of the factors driving the uptick in retail inflation in November would prove to be transient, especially the spike in vegetable prices. However, the continued impact of house rent allowance revision on housing inflation and elevated fuel prices suggested that the CPI inflation was likely to be in the range of 4.4-4.7 per cent for the rest of FY18, she added.