Capital Gain

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

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Growth-inflation dynamics improve for the economy with the expanding slightly in December and retail price inflation declining to a 16-month low in January. However, economists believe growth is still weak and inflation in non-food items face pressure, and that may force the of the to remain accommodative.

The (IIP) grew by one per cent in December year-on-year, compared to a 2 per cent decline the previous month, data released by the National Statistical Office showed. On the other hand, the consumer price index (CPI)-based inflation rate fell for the third straight month to 4.06 per cent in January as food inflation, pulled down by deflation in vegetables, drastically declined. The inflation rate stood at 4.59 per cent in December and a high base of 7.59 per cent in January 2020.

“In view of the growth-inflation dynamics and the guidance given by the RBI, we believe that the RBI 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.

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

“While the Indian industrial sector expectedly returned to a growth in December 2020, the pace was tepid at 1.0 per cent, and trailed our expectations (+2.2%). Even as many lead indicators have displayed a robust pace of expansion in the recent months, the subdued 1.0 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. The economy contracted 23.9 per cent in the first quarter and 7.5 per cent in the second quarter. It is officially projected to decline 7.7 per cent in the current financial year.

She expected the pace of industrial growth to inch up in January 2021.

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 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 a 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 of 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 sectors posted growth in December, with computer and electronic products posting an 18.9per cent expansion, followed by 8.1 per cent growth in electrical equipment, and 7.2 per cent in chemicals and chemical products.

Food inflation moved down to just 1.89 per cent in January from 3.41 per cent in the previous month. CPI 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 swiftened at 15.84 per cent in January 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 rise in the inflation rate over the same period.

CPI inflation rate had remained over six per cent mark, breaching RBI’s mandate for most part of 2020. It was only in December that the rate fell dramatically, the process which continued in January.

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