Two sets of data releases by the government on Tuesday present a mixed picture of the Indian economy. The quick estimates of the Index of Industrial Production or IIP for May 2016 show that industrial growth has recovered at 1.2 per cent, compared to a decline of 1.34 per cent in the previous month. In May 2015, industrial growth was estimated at 2.5 per cent. The recovery in May this year, therefore, should be seen in the context of an upward trajectory of industrial growth recorded in the early months of 2015-16 - a trend that continued till October and would certainly pose a challenge this year in the form of a relatively high base effect. Retail inflation, on the other hand, inched up to 5.77 per cent in June, compared to 5.76 per cent in the previous month and 5.4 per cent in June 2015. More worryingly, retail food inflation has moved up at a faster pace, threatening to touch the eight-per cent mark.
On the industrial output front, there were signs of a faint recovery in February with the IIP growth estimated at 1.98 per cent, after three consecutive months of contraction. But expectations of a sustained recovery based on the February performance were soon belied by worsening numbers in the subsequent months that culminated in April's output decline. May has now brought some cheer with the manufacturing sector clocking 0.7 per cent growth after two months of contraction. The manufacturing sector has a 75 per cent weight in the IIP. Thus, even as low a rise as less than a per cent in manufacturing makes a difference to the headline IIP number. This is also because the performance of mining and electricity, the other two components of the index, continues to be in positive territory, though the latter's growth in May saw a considerable decline at less than five per cent, compared to 14.6 per cent in April.
A bigger cause for concern arising out of the IIP numbers is the continued output decline in the capital goods sector, which in May fell by over 12 per cent, the seventh consecutive monthly contraction. There is clearly no sign of recovery in investment demand in the economy. Worse, whatever comfort the consumer durables sector has been offering in the last several months with double-digit growth may not last long. Consumer durables growth in 2015-16 was a healthy 11.3 per cent and in April also it was estimated at 11.8 per cent. For the first time in several months, the growth in this sector in May has decelerated to about six per cent, suggesting a depressed demand situation in the economy. With consumer non-durables already showing contraction and the higher base effect of the months from July to October this year, the prospects of sustaining the recovery seen in the May IIP number look remote.
Retail inflation for June has thrown up a new challenge. While the inflation level for vegetables, pulses and sugar items continues to range between 15 and 27 per cent, the latest numbers show that retail inflation in rural India for all goods has declined, while that for urban India has gone up significantly. Even as industrial growth remains tepid and its recovery in the coming months looks uncertain, the Reserve Bank of India is likely to be influenced by the rise in retail inflation, particularly in urban markets. Its monetary policy stance, to be revealed early next month, will, therefore, be closely watched.
