Inflation cheer fades as factory output falters

CPI eases to 5-month low of 5%; IIP contracts by 2.4% in July, worst in 8 months

The relief from reduced retail inflation in August — its lowest level since March — was marred by a sharp fall in industrial production in July, the figures for which were released on Monday.

The jury is out on whether the data would prompt the new Reserve Bank of India (RBI) governor, Urjit Patel, to cut rates. While some said a rate cut could be expected in RBI's first monetary policy meeting next month, others said the central bank might wait till December.

The index of industrial production (IIP) for July was 2.4 per cent lower year-on-year, the bleakest in eight months. It reversed an eight-month high of 1.95 per cent in June. The June figure was revised from the 2.1-per cent estimated earlier.

Cumulatively, IIP declined 0.2 per cent in the first four months of the current financial year against growth of 4.3 per cent in the corresponding period of the previous financial year.

Consumer Price Index (CPI)-based inflation for August was 5.05 per cent, the lowest since March. It had touched a 19-month high in July.

“Last month, we had said CPI inflation will be moderate and come down. So, this is on expected lines,” said Economic Affairs Secretary Shaktikanta Das told reporters in the finance ministry.

He added: “Now, if you see, there has been significant moderation in pulses and vegetables. That accounts mainly for the inflation coming down to five per cent. Going forward, we expect inflation levels to remain in the moderate zone. Depending on prices of prices, it could come down even further.”

Das also said he expected RBI to take this into consideration and take a call. “I’m sure they will consider all the aspects.”

Das said IIP data was a matter of concern but added that as a sample of 400 companies, it was not truly reflective of the state of affairs.

“Certainly, the numbers that have come out, which are in negative zone, are a matter of concern, and do not reflect the full picture,” he said.

According to data issued by the Central Statistics Office on Monday, the contraction in industrial output was primarily because of a continued slowdown in manufacturing, with the sector’s output down 3.4 per cent in July and down 1.4 per cent for the April-July period, year-over-year.

The other two broad segments — mining and electricity — also showed marked deceleration.

Mining could grow by only 0.8 per cent in July against 5.3 per cent in June and electricity by 1.6 per cent from 8.3 per cent.

Within the manufacturing sector, capital goods were down nearly 30 per cent for July, with a cumulative negative impact in April-July of 21.3 per cent. This is the ninth straight month that capital goods have been in negative territory.

The IIP data for July “has been depressed by one element in the index i.e. electrical machinery which declined by 59 per cent. Excluding this category, production would be 2.1 per cent. The negative growth in capital goods has been on expected lines as investment has not yet taken off given excess capacity in most sectors,” said Madan Sabnavis, chief economist, Care Ratings.

“Although lead indicators had pointed to a slowdown in industrial growth, the contraction posted by the IIP in July 2016 has come as a surprise, with the performance of manufacturing gloomier than anticipated. The sequential downturn in the performance of industrial output was broad-based, with a weaker performance of all the use-based categories except consumer durables,” said Aditi Nayar, senior economist, ICRA.

However, Sabnavis added industrial growth could recover to register growth of around four per cent for the year on the assumption of accelerated spending leading to higher growth in production of consumer goods.

CPI inflation primarily moderated due to lower food inflation. Consumer Food Price Inflation (CFPI) was 5.91 per cent year-over-year in August, compared with 8.35 per cent in July. “A sudden fall in retail inflation is largely driven by the food items namely vegetables, pulses and sugar... baffling behaviour of retail inflation in the past suggests that this fall should be taken with a pinch of salt as a large part of the food inflation is structural in nature,” said Sunil Sinha, principal economist, India Ratings.

ICRA’s Nayar and Care Ratings Sabnavis both said that going forward, CPI inflation will hover around the 5 per cent mark. “However, with domestic demand revival post pay revision warranting some caution, we continue to expect monetary easing to be limited to 25 bps in the remainder of 2016, despite today's adverse IIP print,” Nayar said.

“The CPI inflation number will hover around the 5 per cent mark in the next few months which will be taken positively by the RBI for deciding on interest rate cuts. But we do not expect a rate cut in the forthcoming policy in October,” Sabnavis said.