Is the worst over? Decoding the IIP, CPI numbers

Key economic indicators such as industrial production and retail inflation suggest a nascent economic recovery

Data on key economic indicators to be released later today are likely to reaffirm that a nascent recovery is underway. Of the two economic indicators – the Index of Industrial Production (IIP) and Consumer Price Index (CPI)-based inflation – the IIP numbers will reveal whether both business and consumer sentiments are gaining momentum. In the CPI, or retail inflation, of particular interest is the direction of food inflation, in particular vegetable and fruit prices. 

 

Past data showed that IIP had moved back into positive territory on the back of a revival in the manufacturing sector. Manufacturing, which constitutes over 75 per cent of the index, grew at 2.5% and 4.8% in April and May 2014, respectively. Digging deeper into the data, one finds that the number of industries registering negative growth had gone down to six in May 2014. This can be construed as a sign that the recovery is gathering momentum and getting more broad-based. 
 

On a used-based classification, the key indicators to watch are capital goods and consumer durables. While capital goods, considered a proxy for investment demand, has been widely erratic, positive growth will reaffirm a revival narrative in business sentiment. The other key indicator, consumer durables, have broken a 12-months streak of negative growth with a 3.2 per cent in May 2014. Growth in this sector will indicate a rekindling of consumer sentiment. 

 

On inflation, recent data does show a downward trend in the consumer price index (CPI), despite vegetable and food prices firming up. Arvind Virmani, former Chief Economic Advisor at the Finance ministry, said “Inflation is on a downward trend at this point. However the uncertainty arising from poor monsoon in certain regions and oil price spikes cannot be ignored. Furthermore, inflation expectations are still unbelievably high.”
 

On inflation, RBI’s focus has shifted to achieving its target of 6% by 2016. Given that inflation expectations still remain elevated and that the effect of a less-than-sufficient monsoon will be reflected in inflation data over the coming months, the decision to reduce repo rates will likely be postponed till the end of the current fiscal year.