Industrial output recovers by a small 1%, retail inflation at 16-month low | Business Standard News

Clipped from: https://www.business-standard.com/article/economy-policy/industrial-output-recovers-by-a-small-1-retail-inflation-at-16-month-low-121021201704_1.html

Experts say MPC may continue with accommodative stance in next nine months

Industrial activity has posted growth in only three months in the current financial so far

The growth-inflation dynamics seem to be improving for the economy, with industrial output posting mild expansion in December and the retail price inflation rate declining to a 16-month low in January. However, economists believe that growth is still weak and non-food articles like fuel continue to face inflationary pressures, which may force the Reserve Bank of India (RBI) to remain “accommodative”.

The Index of Industrial Production (IIP) grew by 1 per cent in December on a year-on-year (YoY) basis compared with a 2 per cent decline in the previous month, the data released by the National Statistical Office showed. On the other hand, the consumer price index (CPI)-based inflation rate fell for the third consecutive month to 4.06 per cent in January as food inflation, pulled down by deflation in vegetables, drastically declined. CPI inflation stood at 4.59 per cent in December, and 7.59 per cent in January last year. Food inflation moved down to 1.89 per cent in January from 3.41 per cent in the previous month. “In view of the growth-inflation dynamics and the guidance given by the RBI, we believe that the central bank will continue with its accommodative policy and keep the policy rate in a pause mode over the next 6-9 months,” Sunil Kumar Sinha, principal economist at India Ratings, said.

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Industrial activity has posted growth in only three months in the current financial year so far. The IIP had turned positive in September after a gap of six months on the back of the festival season demand, indicating normalcy in economic activity after months of disruption caused by Covid-19.

“While the Indian industrial sector expectedly returned to growth in December 2020, the pace was tepid at 1 per cent, and trailed our expectations (+2.2%). Even as many lead indic­ators have displayed a robust pace of expansion in recent months, the subdued 1 per cent growth of the IIP in Q3 FY2021 suggests that the recovery in the broader economy remains relatively measured,” said Aditi Nayar, principal economist, ICRA Ratings. She expected the pace of industrial growth to inch up in January 2021.

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The economy contracted 23.9 per cent in the first quarter and 7.5 per cent in the second quarter of FY21. It is officially projected to decline 7.7 per cent in the current financial year.

Manufacturing sector activity in December expanded by 1.6 per cent led by significant growth in the consumer durables sub-sector, largely on account of the low-base effect. Consumer durables, comprising mainly white goods and mobile phones, saw 4.9 per cent growth compared to 3.4 per cent contraction in the previous month and a 5.6 per cent decline in December last year.

Consumer non-durables, comprising essential goods with a broadly non-elastic demand, grew by 2 per cent in December, as against 3.2 per cent contraction last year. Construction goods production grew by 0.9 per cent during the month. Capital goods grew by a mere 0.6 per cent, despite a very low base (18.3 per cent contraction) in December last year. Electricity production grew by 5.1 per cent in December, indicating a pick-up in demand from factories. Meanwhile, mining posted 4.8 per cent contraction during the month.

Of the 24 sub-sectors, only nine posted growth in Dec­ember, with computer and electronic products seeing 18.9 per cent expansion, followed by 8.1 per cent growth in electrical equipment, and 7.2 per cent in chemicals and chemical products.

CPI inflation is mainly influenced by food prices since food items have more than 45 per cent weight in the index. Within food items, the rate of fall in vegetables prices was at 15.84 per cent in January, as against 10.41 per cent in the previous month.

However, fuel and light inflation rose to 3.87 per cent from 2.99 per cent in the same period. Services such as health and recreation and amusement also saw a rise in the inflation rate over the same period.

CPI inflation had remained over the 6 per cent mark, breaching the RBI’s target for the most part of 2020. It was only in December that the rate fell dramatically.

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