A longer pause?

Retail inflation, factory output data make for a sobering read

In stark contrast to talk of deflation in the economy, India’s retail inflation, measured by the Consumer Price Index (CPI), grew by 3.36 per cent in August. This is the second straight rise after a 2.36 per cent increase in July. The two put together undermine the growing notion of a deflationary trend taking hold after the CPI growth had decelerated for three months before July. The latest triggers for the rise in prices have been a spike in fruit and vegetable prices as well as a hike in the house rent allowance. Moreover, the impact of the newly introduced goods and services tax (GST) regime has been inflationary. Crucially, core inflation, too, has grown by 4.6 per cent. Most analysts now hold that, notwithstanding a possible easing of food inflation by October, a rate cut by the Reserve Bank of India (RBI) in its next monetary policy review is ruled out.

The RBI, which cut the repo rate by 25 basis points in its last review in August, had crucially maintained a neutral policy stance. It had, as it has done for the most part since demonetisation was announced in November last year, pointed to the uncertainty about the future trajectory of inflation. A key factor weighing on the RBI’s monetary policy committee’s decision was the likely impact of Pay Commission hikes in the current financial year. The roll-out of the GST is another factor that could upset calculations. The RBI has been severely criticised in the recent past by many for overestimating the threat of inflation while disregarding the slowdown in economic growth. There were murmurs that the central bank, in fact, contributed to the slowdown by keeping interest rates too high. The latest data would perhaps justify the RBI’s caution.

That is not to say that the threat of a deeper economic slowdown is over. Far from it. The country’s industrial activity, measured by the Index of Industrial Production (IIP), expanded by just 1.2 per cent in July, according to another set of data released on Tuesday. While this was better than the contraction of 0.2 per cent in the previous month, yet it was a considerable drop from the growth of 4.5 per cent in the same month last year. The overall data, however, masks a huge variance in sectoral growth. While mining and electricity recorded growth rates of 4.8 per cent and 6.5 per cent, respectively, the all-important manufacturing sector’s growth, at 0.1 per cent, barely registered any movement. In terms of industries, only eight of the 23 industry groups in the manufacturing sector showed positive growth, year-on-year, during July. The consolidated data for the IIP from April to July — it grew by 1.7 per cent, as against 6.5 per cent over the same period last year — now shows the weakness on the industrial front. In terms of use-based classification, growth in both capital goods (which is seen as a proxy for the investment climate in the economy) and consumer goods contracted in stark contrast to a year ago.

Taken together, the two bits of macroeconomic data do not present a happy picture. Rising inflation in the economy almost rules out chances of the RBI coming in to help industrial growth, which continues to disappoint possibly due to the continuing after-effects of demonetisation and the goods and services tax, which continue to disrupt production networks. A turnaround in economic growth, then, is clearly some distance away.