India economy: Growth stutters

Industrial growth dips drastically even as inflation rises faster than expected, blurring policy action outlook.

With inflation in primary articles at 20 per cent levels (for the week ended December 25), up from 17.24 per cent in the previous week, economists were quite certain that the Reserve Bank of India (RBI) would act aggressively while raising rates in the monetary policy review on January 25. However, with the historically-strong November IIP (index of industrial production) number much below expectations at 2.7 per cent, as compared to 11.3 per cent a year ago, the sentiment has changed to suggest a more muted action.

Rupe Nitsure, chief economist, Bank of Baroda, says cost pressures have increased substantially, as food inflation puts pressure on wages and salaries, with non-food inflation affecting industrial raw material and input costs, alongside commodity prices. She believes the economy is going through a hyper-inflationary period and so growth will be affected, even as the base effect of higher growth last year comes into play. The cost pressures have already impacted inflation, she notes, making a case that lower growth-lower inflation is preferable to higher growth-higher inflation.

Given that real interest rates are not that high and the base effect will ensure that IIP growth tapers off, she expects RBI to target inflation and sees a 25 basis points rate rise in the review, with another 25 basis points increase before March, depending on fresh liquidity data.

However, the data quality is still suspect. Given the revisions in the earlier data, the IIP number could see an upward correction. Arun Singh, economist, Dun and Bradstreet, says a steep decline in the consumer goods segment can be because of an early festive season, which boosted October numbers.

However, he adds, the low intermediate goods production indicates demand is trending down, which will make RBI cautious about raising policy rates, given that it is the supply-side factors that are seen as the main inflation drivers.