Ind-Ra: Divergence in Retail and Wholesale Inflation to Continue in February

India Ratings and Research (Ind-Ra) expects Index of Industrial Production (IIP) growth in January to remain subdued. On the prices front, the Wholesale Price Index (WPI) inflation is likely to remain in the negative territory and Consumer Price Index (CPI) inflation is likely to drop marginally in February compared to January 2016. Ind-Ra estimates IIP growth at 1.7% in January 2016 and WPI and CPI inflation at -0.8% and 5.5% respectively in February 2016.

Industrial output has remained in the negative territory for two consecutive months (November and December 2015), in January 2016 however is expected to benefit from a pick up in the eight core sectors output, namely strong growth in coal output (9.1%), cement (9.0%) and electricity generation (6.0%). Cumulatively the eight core industries grew at 2.9% in January 2016, not a significant growth but the highest in three months. The core industries have a weightage of 38% of the total IIP. Although the healthy growth in three core sectors has brightened the outlook for the basic goods sector, a sustained negative growth in crude oil and natural gas production, coupled with weakness in fertilizer output growth is likely to keep the upside in the basic goods output growth under check.

The capital goods sector has witnessed negative growth in the last two months. The growth prospects of the sector are unlikely to improve in January 2016 due to a strong base effect. Ind-Ra believes, similar to the previous few months, the consumer durables sector will continue to perform well.

The Global commodity cycle continues to impact domestic inflation. When commodity prices were rising in 2013 and 2014, India struggled with imported inflation. However, with crash in commodity prices, the situation since the beginning of 2015 has reversed and India is now struggling with imported deflation. The Indian government has been one of the biggest beneficiaries of the decline in commodity prices, especially crude. This helped the government to control the fiscal deficit, both by lowering expenditure due to the lower subsidy pay out and higher tax revenue by hiking the excise duty on petroleum products.

However, neither a prolonged phase of high inflation nor a prolonged phase of deflation is beneficial for the economy. No wonder, the Reserve Bank of India has its inflation target at 4.0% with a deviation of +/- 2.0%. Ind-Ra expects a marginal decline in retail inflation in February 2016 compared with the previous month due to higher year on year decline of crude prices and reduction in the prices of pulses, fruits and vegetables in February 2016 compared to January 2016.

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