Industrial activity expanded 7.5 per cent in January, up from 7.1 per cent in December. This is the third straight month that industrial output has expanded by more than 7 per cent, suggesting economic activity is gaining as the effects of demonetisation and the goods and services tax (GST) dissipate.
Retail inflation, measured by the consumer price index (CPI), moderated to a four-month low of 4.4 per cent in February, aided by a fall in the price of pulses and moderation in vegetables, led by onion. The CPI rise was 5.07 per cent in January. Headline inflation is now lower than the Reserve Bank’s monetary policy committee (MPC)’s forecast of 5.1 per cent for the March quarter. However, core inflation (sans food and fuel items) remains elevated at above 5 per cent. This could leave little room for the MPC to ease the policy rate of interest.
Manufacturing, 77.6 per cent of the Index of Industrial Production (IIP), grew 8.7 per cent in January, up from 8.5 per cent in December. Of the 23 industries in manufacturing, 16 recorded positive growth. The highest was in the other transport equipment category, followed by furniture and motor vehicles, trailers and semi-trailers. Electricity grew 7.6 per cent. However, mining output plummeted to 0.1 per cent.
Over the entire April-January period of the current financial year, the first 10 months, the IIP has grown 4.1 per cent, compared to five per cent over the same period in 2016-17.
“To average 5 per cent growth for the entire year, the next two months have to register 9-9.2 per cent growth,” said Madan Sabnavis, chief economist at CARE Ratings. “Maintaining growth of around 7 per cent in February and March can lead to average growth of around 4.75 per cent for the full year. This can be a good base for next year, when it can be pushed to 6 per cent, if sustained.”
Source: Ministry of Statistics and Programme Implementation
Within the IIP, capital goods, which connotes investment, continued their healthy momentum, growing by 14.6 per cent in January, marginally higher than 14.4 per cent in December. “But, this has to be qualified, as capital goods are driven by the vehicle segment and partly by non-electrical machinery. Electrical machinery is still de-growing by 14 per cent,” said Sabnavis.
While consumer durables grew 8 per cent in January, the segment has contracted by 0.3 per cent from April 2017 to January this year, compared to growth of 4.1 per cent over the same period in the previous financial year.
Aditi Nayar, principal economist with ratings agency ICRA, says the trend in the growth of Coal India’s output, electricity generation and automobile production suggest the pace of IIP expansion would see sequential moderation in February.
So, it is premature to say anything for sure about the larger economic growth in the March quarter, the fourth and final one of 2017-18. Gross domestic product grew 7.2 in the third quarter, from 6.5 per cent in the second one.
The moderation in headline retail inflation is driven by lower food inflation and in fuel and lighting. The consumer food price index eased to 3.26 per cent in February, down from 4.7 per cent in January. It was 4.96 per cent in December.
Pulses’ prices continued to contract and vegetable inflation fell to 17.57 per cent in February, down from 26.9 per cent in January.
However, core inflation still remains above five per cent. “This is unlikely to change the Reserve Bank’s stance, as non-food inflation numbers are still higher. Clothing is at five per cent, rentals at 8.3 per cent, fuel at 6.8 per cent. Core CPI is above five per cent and the core inflation number signals the future trajectory, as food inflation numbers can change due to seasonal factors,” says Sabnavis.
“CPI inflation remains above the MPC’s medium-term target of four per cent, and the available data suggests a likely uptick in Q1 of FY19. Additionally, core CPI inflation remains elevated. Accordingly, many MPC members might prefer to wait for additional data before meaningfully changing the tone of the policy outlook,” said Nayar.