IIP & CPI numbers: Neither here nor there

Deriving conclusions from recent data will not be easy

The April numbers for the Index of Industrial Production (IIP) and the May numbers for the Consumer Price Index (CPI) were published last Friday. Industrial production grew by 4.1 per cent over April 2014, pulled up by a rather striking 5.1 per cent growth in manufacturing, which accounts for about 75 per cent of the index basket. Both these numbers are significantly above the 2014-15 full-year growth rates of 2.8 per cent and 2.3 per cent respectively. While, clearly, this does not suggest a strong recovery by any means, it adds some substance to the slow-and-steady recovery narrative. On the inflation front, the year-on-year rate rose from 4.87 per cent in April to 5.01 in May. With both growth and inflation accelerating, the space for expansionary monetary policy will inevitably be constrained.

However, the disaggregated numbers tell a somewhat more nuanced story. In manufacturing, the dominant driver of growth was the capital goods sector. This grew by 11.1 per cent in April, substantially higher than its growth during 2014-15. Within this sector, however, while machinery and equipment grew by over 20 per cent, electronic and office machinery declined by over 34 per cent. Transportation equipment grew by a modest 6.9 per cent. On the other hand, consumer goods grew by a much more sluggish 3.9 per cent, although durables returned to positive territory after a miserable 2014-15. Overall, there is a significant amount of dispersion in the growth rates across different industries, which is not the characteristic of a broad-based recovery.

On the inflation front, while the Reserve Bank of India (RBI)'s primary concern has been the risks to food prices as a result of a disrupted rabi season and forecasts of a poor monsoon, food inflation actually went down in May compared with April. So far, at least, the rabi production shortfalls are not translating into price pressures. The only major food category to show a sharp increase is pulses, the prices of which rose by over 16 per cent. This could be a cause of concern in the months ahead, but, for now, food prices have held steady in the face of past and anticipated adverse weather conditions.

From a policy perspective, both these sets of numbers are neither here nor there. The monetary policy process could read into them exactly what the guidance given by Governor Raghuram Rajan on June 3 suggested; he is worried about the softness in the inflation numbers being short-lived. However, the pressures are not, for the moment at least, emanating from the most obvious source - food. Could capacity constraints in various sectors be leading to price increases in the face of even moderate increases in demand? Possibly, but this hypothesis needs to be tested before basing policy decisions on it. On the production side, core cyclical sectors like metals and their fabrications do not suggest any significant acceleration compared to the past 12 months; in fact, cement actually declined in April from the previous year's level. So it appears that one can read into the data on both inflation and production precisely what one wants to read into it. This makes the data-driven policy approach that the RBI has said it is following that much more complicated.