Monetary policy stance needs review

RBI can no longer ignore the message emanating from IIP and inflation data

Yesterday, the Central Statistics Office of the Union government released data on industrial output growth for November and retail inflation for December. Both the releases have brought little cheer to an economy that is still struggling to revive growth. Industrial output fell by over three per cent - the first output decline in more than a year, and the steepest fall since October 2011. The retail inflation rate, based on the consumer price index, inched up to 5.61 per cent for December, compared to 4.28 per cent recorded in the same month of 2014. The retail inflation rate in November 2015 was estimated slightly slower at 5.41 per cent. While the gradual rise in the consumer price index may be on expected lines and it continues to stay below the inflation range outlined by the Reserve Bank of India, the contraction in industrial output is a nasty surprise, coming as it does after a robust rise of 9.8 per cent in October 2015. A relatively benign retail inflation rate and healthy growth in industrial output had given rise to expectations of a gradual revival in the economy. The latest numbers are bound to cause a rethink not only on the likely trajectory of industrial output and retail inflation in subsequent months, but also on the policy response needed to tackle the new situation.

It must be noted, however, that there is no change in the contribution of different product categories to the gradual rise in retail inflation. Apart from tobacco and intoxicants, which have low weights of less than four per cent in the consumer price index, food and beverages continue to be the biggest items driving up consumer prices. With weights of almost 55 per cent in the index, food and beverages have seen the sharpest rise - of over six per cent. And within that category, pulses have seen an inflation rate of over 45 per cent. Clearly, India's retail inflation continues to be driven by food products. Supply-side measures along with steps to encourage more efficient distribution channels should go a long way in tackling it.

The three per cent contraction in industrial output is an even bigger cause for worry. The manufacturing sector, which has a weight of over 75 per cent in the index of industrial production, has recorded an output decline of over four per cent. In October, the manufacturing sector had shown signs of coming back to life with growth of 10.6 per cent. But in November, as many as 17 out of 22 industrial groups in the manufacturing sector showed a contraction. The capital goods sector contracted by over 24 per cent, signalling that there is as yet no recovery in sight on the investment front. There is no doubt that the decline in exports in each of the last 11 months has made matters worse for the manufacturing sector. The government must recognise the importance of giving exports a big push with a fine-tuned trade policy that allows domestic manufacturers to have better access to world markets that are increasingly getting fragmented into trading blocs. For the Reserve Bank of India (RBI), which is due to come out with its next monetary policy review in February, the message emanating from both the data releases can hardly be ignored. Industrial growth in the first eight months of the current financial year is less than four per cent. Retail inflation is inching up, but it is still below the danger level fixed by the RBI. There is a need for a rethink on its monetary policy stance.