A double whammy

Worsening inflation, factory output point to policy challenges

On Wednesday, two important sets of data emerged about the economy: The consumer price index-based inflation for March and the index for industrial production (IIP) for February. Retail inflation reached a five-month high at 3.8 per cent, inching up from 3.7 per cent in the month before, while the IIP contracted by 1.2 per cent immediately after growing by 3.3 per cent in January. The uptrend in inflation shows, yet again, how prescient the Reserve Bank of India’s (RBI’s) monetary policy committee was in February, when, much against market expectations, it ended the easy money policy, started in January 2015, and returned to a more “hawkish” stand on inflation. The fall in the IIP, on the other hand, should worry the government more since it reflects the continued impact of demonetisation. 

On inflation, however, it is not all gloom and doom. The fact is, at 3.8 per cent, retail inflation for March was not only lower than what most economists expected – around 3.9 per cent – but also well within the RBI’s inflation target of 5 per cent for March-end. What is even more heartening is that both food prices, which have been the main contributor to high inflation in the recent past, as well as core inflation, which has been persistently high, have moderated. The price of pulses and spices fell and the growth in oils, vegetables and fruits (on a seasonally adjusted sequential basis) decelerated. Core inflation, which maps the long-run price trend by taking out commodities, such as food and fuel that see transitory changes, slowed to 4.5 per cent, year on year, at the end of 2016-17 from 5.3 per a year ago. 

In comparison, the dip in the February IIP is of greater concern. For one, it came as a surprise to analysts — for instance, CARE Ratings expected 2.3 per cent growth — and 13 out of the 22 industries in the manufacturing sector recorded negative growth. Among user-based categories, both capital and consumer goods contracted, but the worst off was the consumer non-durables segment, which contracted 5.4 per cent, month on month. But beyond the monthly fits and starts, what comes through is the stagnant performance for the 2016-17 financial year. On a cumulative basis, over the April-February period, industrial output has grown at the rate of just 0.4 per cent, as against 2.6 per cent growth over the same period in the year before.

Taken together, both sets of data point to a wide array of challenges for policymakers in the coming months. The performance of the IIP will not inspire many to claim that a robust recovery is around the corner. In particular, the investment horizon continues to look bleak as seen through the negative growth in the capital goods segment; over April-February 2016-17 it has contracted by 14 per cent. And while things are more in control on the inflation front, there are several risks facing the economy in the second half of 2017-18. These include an increasing likelihood of El Nino and the resultant hike in food inflation, the second-round impact of the Seventh Pay Commission and a one-off price bump because of the goods and services tax. Add to these the fiscal impact of sundry loan waivers by state governments and imported inflation due to a global recovery. Clearly, the government has its work cut out.