After scaling a five-year-high growth of 9.9% in October, industrial output contracted 3.2% in November 2015, its sharpest drop since October 2011, as one-off factors like an unfavourable base effect due to a shift in the festive calendar and floods in Chennai drove down production, reports fe Bureau in New Delhi. Official data released on Tuesday also showed retail inflation inching up to 5.61% in December, its highest since September 2014, marking a fifth straight monthly rise.
While analysts feel the November index of industrial production (IIP) data should be viewed with a pinch of salt, given the fewer working days due to the Diwali (the festival fell in October in 2014), the intensity of contraction surprised them.
Moreover, the almost 40-basis-point rise in retail food inflation in December from 6.07% in the previous month and the increase in fuel inflation to 5.45% in December from 5.28% in the previous month following the hike in the excise duty suggests that inflationary pressure from such items in the coming months will not evaporate.
Importantly, the output of capital goods, a gauge for fixed corporate investment, shrank 24.4% in November, against 42.2% expansion in the previous month. Consumer goods production rose only 1.3% in November even on a favourable base (the segment had contracted by 1.6% a year earlier). While consumer durables witnessed a 12.5% jump in November, aided by the low base (it had contracted 14.5% a year before), non-durables output dropped 4.7% in December. This suggests private demand is yet to recover, thanks to the rural distress following a second straight year of deficient monsoon and a crash in global commodity prices.
Still, IIP grew 3.9% in the April-November period, compared with 2.5% a year earlier, thanks to a rise in IIP earlier this fiscal.
Both the IIP and inflation data, however, reinforce fears that a sustained industrial recovery is still some way away, while inflation may remain sticky even though analysts believe the consumer price index (CPI) inflation will still be lower than the central bank’s target of 6% by January. Moreover, the impact of an unfavourable base for retail inflation will wear out from this month.
The data showed manufacturing hit -4.4% in November, compared with 4.7% a year earlier. Mining rose just 2.3% in November, against 4% in the previous year, while electricity production barely rose (0.7% in November against 10% in the same period last fiscal).
Crisil expects the Reserve Bank of India (RBI) will keep policy rates unchanged for the rest of this fiscal “unless inflation surprises on the downside”. “In fiscal 2017, we believe, CPI will moderate further to 5.2%. This is under the assumption of further fall in food inflation on the back of normal monsoons, whereas pressures on non-food inflation (excluding fuel) under check,” it said.
“Although there was a widespread contraction among the use-based indices, the 24.4% contraction in capital goods output acted as the chief drag upon the performance of the IIP index in November 2015. The double-digit growth recorded by consumer durables in November 2015 offers little encouragement, as it benefited from a favourable base related to a considerable contraction in November 2014,” said Aditi Nayar, senior economist at ICRA.