Twin shocks for economy as growth slumps, retail inflation picks up

A worker uses a welding torch to weld an iron machine at the construction site of a flyover in New Delhi. Photo: Reuters.
The economy showed worrying signs as industrial growth slumped in May and retail inflation picked up in June,  presenting a difficult choice on the policy rate  front for the monetary policy committee (MPC) before its meeting next month.

The Consumer Price Index (CPI)-based inflation rate rose to a five-month high of 5 per cent in June, overshooting the Reserve Bank of India’s (RBI’s) projection of 4.8-4.9 per cent in the first half of 2018-19, shows the official data released on Thursday.

Separately, the Index of Industrial Production (IIP) slowed to a seven-month low of 3.2 per cent in May. Although the CPI came below market expectations of 5.3 per cent, with the core inflation rate rising to 6.4 per cent in June, and with the government announcing steep hikes in minimum support prices (MSPs), the chances of a rate hike by the MPC increase when it meets next on August 1, say some economists. However, others say that the MPC might pause.

“Notwithstanding the lower-than-expected prints for the IIP and headline CPI inflation, the uptick in core CPI inflation suggests a high likelihood of a repo rate hike in August,” said Aditi Nayar, principal economist at Icra. 

The RBI would be watching this number closely and an adverse report on monsoon or a further spike in oil prices could hasten a rate hike in the coming policy, said Madan Sabnavis, chief economist at CARE Ratings.

“Otherwise it would be pause presently, followed by a rate hike towards the end of calendar 2018,” he said.
It would be a tough call for MPC, said Devendra Pant, chief economist with India Ratings and Research (Ind-Ra). ”However, Ind-Ra believes the MPC may go for a pause in August and take a call on the policy rate in the October review,” he said. 

Food inflation slowed to 2.9 per cent in June, from 3.1 per cent in May, but is likely to perk up in the coming months as the steep hikes in MSPs work their way through the system.

“The impact of higher MSPs on inflation and fiscal risks and a string of expenditure announcements by state governments such as the recent crop loan waiver by Karnataka have resulted in upside risks to the inflation trajectory for the remainder of 2018-19, notwithstanding a favourable base effect and the recent dip in crude oil prices,” noted Nayar. 

Much also depends on the monsoon. Till July 12, the southwest monsoon was around 8 per cent less than normal across the country, with states like Uttar Pradesh receiving less than half its normal quota of monsoon so far. 

Though rains picked up pace from July onwards, particularly in the main oilseeds, pulses, and cotton growing belts of central, west, and north India, it still has not been strong enough to cover the deficiency.

On the other hand, manufacturing growth slumped to a low of 2.8 per cent in May, from 5.3 per cent in the previous month, pulling down the overall IIP growth. 

Mining, which grew by 5.7 per cent, contributed the most to IIP, followed by scientific instruments, diesel, electricity, and commercial vehicles. Thirteen of the 23 industry groups in manufacturing showed positive growth. 

The capital goods segment in IIP, which connotes investment, slowed to 7.6 per cent in May, down from 11.9 per cent last month. Similarly, infrastructure/construction goods segment also slowed to 4.9 per cent, presumably driven by a dip in cement and steel.

Consumer durables remained steady, while consumer non-durables contracted 2.6 per cent in May. 

“Growth has been led once again by the consumer goods and capital goods segments with automobiles, electronics, and furniture leading the way,” said Sabnavis. 

Growth is still taking baby steps. While more sectors have witnessed positive growth, it is not all-encompassing, he said, adding the base effect has worked in case of capital, infrastructure, and consumer durables. 

Overall gross domestic product growth is expected to be high in the first quarter of 2018-19 due to low base of 5.6 per cent a year ago, but subdued IIP growth may put a dampener.


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