Uncertain outlook for IIP, CPI likely to edge upwards marginally

Despite the new GDP series showing strong industrial growth, growth in IIP has remained lacklustre

Underlining the uncertainty that marks industrial growth, economists' expectations of the trajectory of the index of industrial production (IIP) remain mixed. 

According to Moody's Analytics, a research arm of the Moody's group, IIP for the month of January which is to be released later today is expected to grow at 2 per cent, marginally higher than 1.7 per cent in December. But according to a Reuters poll of 24 economists, industrial output is expected to slow down to 0.65 per cent. 

Despite the new gross domestic product (GDP) series showing strong industrial growth, growth in IIP has remained lacklustre. With the exception of April, May and November, IIP growth has hovered below 3 per cent in every other month. This is in sharp contrast to industrial growth which according to the new GDP series is pegged at 6.1 per cent for 2014-15. IIP on the other hand expanded by only 2.1 per cent in April-December.

Part of the growing divide between the two is due to the difference is methodology. While IIP is a volume based indicator, the latest GDP series captures value added especially by large corporates better. 

To bridge the divide between the two series, the IIP methodology is in the process of being revised. This according to Moody’s analytics should bring it in line with the new GDP series. 

On inflation, the Reuters  poll suggests that inflation edged upwards marginally to 5.2 per cent in February, up from 5.11 per cent in January. But this remains well below the six per cent target of the Reserve Bank of India (RBI). 

Though the RBI, in a surprise decision, cut interest rates, lacklustre industrial growth and moderate inflation is likely to put further pressure on the central bank to lower rates and thus reduce the real interest rate in the economy.