Even as the market is abuzz with the expectations of a moderate rate cut by the Reserve Bank of India either at its early February policy review or after the Union Budget is presented, a raft of economic data released by the government on Monday seemed to somewhat endorse the official view that the slowdown has bottomed out. Industrial production grew at a faster-than-expected 3.8% in November, smartly recovering from a three-year trough of -4.2% in the previous month.
The uptick, though, was helped by a favourable base, along with a pick-up of sorts in manufacturing and capital goods offtake.
Higher food prices coupled with a thinning of the base advantage led consumer price inflation to move up for the first time in five months in December to 5% from November’s 4.38%, which was the lowest since the relevant index was first computed in January 2012. The muted pace of acceleration, however, promoted analysts to declare that retail inflation could over the course of the next year average around 6%, giving comfort to the RBI which is fighting a brave battle against price rise.
However, given that the Index of Industrial Production along with key sub indices like “manufacturing” and “consumer goods” had seen significant spurts for a few months since December 2013, only a big improvement on the ground could produce good numbers for December 2014 and the subsequent few months.
Manufacturing, which contracted 7.6% in October, posted a 3% growth in November. The highly volatile capital goods segment put in a 6.5% growth in November compared with -2.3% in October and 0.1% in November 2013. Consumer goods, which had been in the negative growth territory for several months in a row, contracted 2.2% in November compared with a contraction of 18.6% in October, indicating that consumer sentiment continues to be extremely weak.
Prices of cereals, which have a huge weight of 34% on the CPI food index, contributed in a big way to the muted growth in retail inflation in December. Vegetable prices actually fell month-on-month while the increase in fuel prices was marginal. On an annual basis, cereal prices rose 3.98% in December while pulses became costlier by 7.24%. Vegetable prices rose just 0.58% annually while fruits turned expensive by 14.8% from a year earlier. Although a fall in global commodity prices would help, some analysts forecast a possible return of inflationary pressure once the base advantage started to wear off. Also, supplies of seasonal items such as vegetables usually fall after April. Structural problems in the food economy persisted, they noted.
“Keeping aside the base effect impact, this inflation data has been positive,” said Shubhada Rao, chief economist at YES Bank. “I would think that the stage is quite set for a February 3, 25 basis points rate cut.”
Among the items that showed high negative growth in November were “telephone instruments” (-67.3%), “shipping building and repairs” (-41.1%), “wood furniture” (-41.1%), “sugar machinery” (-40.9%), “cement machinery” (-38.9%) and “glass sheets” (-30.1%). High positive growth was shown by “HR sheets” (240.8%), “conductor, aluminium” (11%), “air conditioners — room” (53.8%) and Z”sugar” (49.5%).
Although the government has fast-tracked clearances for large projects and given confidence to investors by displaying its intent to quicken reforms by issuing a clutch of ordinances — including those for coal blocks allocation and raising the foreign investment limit in insurance — investments are yet to pick up in a conspicuous manner.
According to the latest gross domestic product (GDP) data, fixed investment — gauged by the gross fixed capital formation data — barely grew in the second quarter of this fiscal, compared with a decent 7% in the July quarter and 3.1% a year before.
The RBI’s easing action on the monetary front would also hinge on the quality of fiscal consolidation by the Centre. The mid-year economic review report suggested recently advocated public investments to be pepped up and recommended a review of the medium-term fiscal consolidation strategy. However, given that the fiscal deficit touched almost 90% of the full-year target by October, the government’s ability to pump in money and stir growth in the second half of this fiscal is limited.
The forecast of a 7% drop in kharif grain production is also expected to hurt farm sector growth in the second half. But a relatively favourable base from the third quarter (the economy grew just 4.6% in each of the last two quarters of 2013-14) will provide some support, likely aiding the economy to expand at 5.5% for the full fiscal, the same as the growth in the first half.
Factory output had declined by 1.3 % in November, 2013. For the April-November period of the 2014-15 fiscal, IIP is up 2.2%, as against 0.1% in same period of last fiscal.