Retail inflation jumped a full 1 percentage point sequentially to a five-month high of 3.36% in August, while the core segment of it (excluding food and fuel) — which is closely monitored by the Monetary Policy Committee — rose 50 bps to 4.5%, somewhat dashing the hopes of another rate cut this fiscal. The goods and services tax (GST) has proven to be inflationary at least in the short term and its transitory slackening effect on industrial production and the economy at large has lingered on, revealed the latest set of government data released on Tuesday.
While the gross domestic product (GDP) expansion had plunged to a three-year low of 5.7% in the April-June quarter, industrial output grew an anaemic 1.2% in July compared with a 48-month low of (-) 0.17% in the previous month and 4.5% a year ago,
Manufacturing, which plunged into negative territory in June (-0.5%), remained flattish in July, exhibiting that factories were yet to stabilise production after taking a hit from pre-GST de-stocking. Capital goods, a close proxy of investments, were still in the negative zone and consumer durables, despite a favourable base (0.2%), contracted 1.25% in July, showing how automobile and white goods sales remained subdued (the auto sales have picked up in August following news that GST cesses were to be hiked).
Consumer price inflation had rebounded from a record low of 1.46% in June to touch 2.36% in July, due to a deflation in food prices narrowed sharply, the GST roll-out and the upward revision of house rent allowance (HRA) for Central government staff. While retail food inflation rose from -0.3% in July to 1.52% in August, the GST —which imposed rates higher-than-expected on many items, including services — inflated the prices of several other key items, including pan/tobacco (6.85%), clothes and footwear (4.58%), housing (5.58%) and also the “miscellaneous” category (3.85%), which include household goods, health and education.
Even after the latest spurt, headline retail inflation would likely remain within the lower end of the central bank’s forecast range of 2-3.5% for the first half of the current fiscal.
However, analysts said the average inflation in the second half of the fiscal could be a worrisome 3.5-4% and the March 2018 figure, inclusive of the HRA effect, could be upwards of 4.5%, even 5%. The consumer price inflation (CPI) index will suffer from a gradual waning of the favourable base in the remaining months of this fiscal.
Sunil Sinha, principal economist at India Ratings & Research, said: “Major reasons for increased inflation are: food inflation increasing to five months’ high (after three months of consecutive deflation), increase in housing inflation by 60 basis points over July 2017, increase in footwear inflation and increase in miscellaneous goods inflation. Vegetable inflation turned positive after 11 consecutive months of deflation in August 2017.”
“Ind-Ra believes despite the dismal first quarter FY17 GDP growth and continuous weak IIP growth numbers, the RBI will maintain a pause in its October 2017 monetary policy,” he added.
Analysts said it was too early to assess how the GST will impact the manufacturing sector in the medium term. While the government has already talked about reducing the GST slabs to two or even one (which would eventually mean that rates on many items including the ones now attracting the 28% rate will come down), when the proposal would materialise will depend on the GST revenue flows to the government.
Tuesday’s data sets, however, prompted economists to affirm their post-Q1-GDP downward biases on growth estimates. The full-year (2017-18) gross value added (GVA) growth is now estimated roughly in the range of 5.5-6.2% by most.
The GST-induced disruptions have not only affected manufacturing for domestic production and local services, but have dented exports also in a big way.
Once the system is stabilised and input tax credit flows get stronger, the inflationary impact of the new tax might wane.
The Nikkei/Markit Manufacturing Purchasing Managers’ Index had risen more than three points to 51.2 in August from 47.9 in July. But the latest industrial production data don’t quite corroborate a post-Q1 revival yet. However, it is expected that the output will start rising faster from September-October as the GST transitional pains abate and the festive season kicks in.