IIP rises only 1.2%, food inflation at 5-month high

The data on the Index of Industrial Production (IIP) and consumer price index (CPI)-based inflation, released on Tuesday, were more bad news for the Narendra Modi government, after growth of gross domestic product (GDP) crashed to its lowest in its tenure last week.

The IIP data showed that economic activity was yet to pick up. Food items becoming more expensive and some services turning pricier because of the goods and services tax (GST) meant CPI-based inflation remained high.

In July, the IIP grew by only 1.2 per cent over the same month last year, recovering slightly from a contraction of 0.1 per cent in June. 

The GST was rolled out on July 1; the fall in the IIP was because of pre-GST destocking. The July figures — lowest in 20 months, if June figures are excluded — showed industrial recovery was still a far cry.

Capital goods output continued to contract in every month of the current financial year (FY18), showing weak investment in the country. However, the rate of decline fell to 1 per cent in July from 6.8 per cent in June and 1.38 per cent in May.

The silver lining is that economists expect industrial recovery to gain momentum as the GST stabilises. 

The CPI-based inflation rate, on the other hand, rose to a five-month high at 3.36 per cent in August from 2.36 per cent in the previous month, as food items, particularly vegetables, became more expensive. In the past three months, vegetable prices had fallen. The GST has also made some services, such as health, transportation and communication, recreation and amusement inflationary. 

This means chances of the RBI cutting the repo rate next month are bleak.

A hike in house rent allowance (HRA) for central government employees also pushed up inflation in rent to 5.58 per cent in August from 4.98 per cent in the previous month. Even if volatile inflation in food and petroleum is taken out, the resultant core inflation rose to 4.5 per cent in August, from 3.9 per cent in the previous month. 

Aditi Nayar, principal economist with ICRA, said she expected inflation to average 3.7 per cent in FY18. While this and subdued GDP growth may give a room for further monetary easing, she said there was low likelihood of further rate cuts in this year, given the uptick in inflationary expectations and hardening of core inflation. 

The RBI had reduced the repo rate by 0.25 percentage points to 6 per cent in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low. 

The government might also find it difficult to perk up capital expenditure, as its fiscal deficit has already touched 92 per cent of Budget Estimates in just four months, primarily because of front loading of expenditure.

The manufacturing sector, constituting more than three-fourth of the IIP, inched up 0.1 per cent in July. It had falling 0.4 per cent in June, and risen 2.6 per cent in May. 

A significant amount of destocking had happened in June in anticipation of the July GST roll-out, after which the manufacturing segment rose due to restocking of inventories and return of consumption demand, Madan Sabnavis, chief economist at Care Ratings, said.

However, 15 of 23 segments within manufacturing showed contraction in July, the same as in the previous month.

Over the coming months, a steady rise in industrial production could be expected, he added.

The other two sectors within IIP also showed growth. Mining output rose by 4.8 per cent after the paltry 0.40 per cent in June, owing to a lull in coal mining.

Electricity output continued to fluctuate by a large degree. It rose by 6.5 per cent in July owing to a spike in demand in the summer months. It had stagnated earlier to a low 2.1 per cent in June from the healthy 8.2 per cent growth in May.

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