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IIP may show marginal improvement, inflation could rise

Indicators like production of coal and automobile, electricity generation suggest a slight recovery in Nov

Ishan Bakshi New Delhi
After an unexpected contraction the previous month, India’s industrial production is likely to have seen a marginal improvement in November 2014. The index of industrial production (IIP) for the month, data for which will be released on Monday, is expected to show some recovery.

The contraction in October, one of the peak spending months, was disappointing because the traditional festival season should have prompted greater consumer spending. According to economists, the possible explanations for the contraction range from a low kharif output leading to a decline in spending on consumer goods, to fewer number of working days in the month affecting production levels.
 

However, leading economic indicators suggest a marginal improvement in November. Automobile production increased 12 per cent in the month, against a decline of five per cent the previous month. Further, Coal India’s production and electricity generation data from the Central Electrical Authority for November also show double-digit year-on-year growth.

But there also are concerns, as recent data reveal rural wages grew at a slower pace than inflation, implying negative real growth. That could be a worrying sign, given that it is rural demand that has been propping up the economy.

On the inflation front, the consumer price index (CPI) moderated to 4.4 per cent in November. But this was on the back of a high base of 11.2 per cent in the same month last year, implying the decline should be viewed with caution.

Though food inflation has moderated, the full impact of a sub-normal and regionally skewed monsoon is likely to be reflected from this month. A lower kharif output will result in higher food prices.

Surprisingly, fuel & light inflation had remained at 3.3 per cent in November, despite global crude oil prices crashing. This, according to CARE, was because “the government has been simultaneously increasing excise duty rates and keeping the market price of petrol and diesel unchanged”. 
 
According to CARE, if CPI for December remains unchanged at 145.5, the retail inflation rate will come at 5.4% — indicating a revival in inflation.
 
Though the recent moderation in inflation has created room for a moderation in the policy rate, the Reserve Bank of India has so far resisted from doing so, saying the easing in inflation is transitory in nature and could reverse. Though higher inflation is likely to justify RBI’s stance, sluggish industrial growth will intensify pressure on it to cut the interest rate to boost growth.

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First Published: Jan 12 2015 | 10:36 AM IST

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