January retail inflation at two-year low, but industrial output falls

 

 

 

 

 

New Delhi: Even as industrial production contracted for the third consecutive month, there was also some good news with retail inflation moderating to a two-year low.

Retail inflation based on the Consumer Price Index (CPI), a key indicator now targeted by the Reserve Bank of India, slowed to 8.79% in January from 9.87% in December mainly on account of easing prices of vegetables.

This is the second straight month that prices have eased, though, in what is bad news for the Congress party heading into the 16th general election, retail inflation levels in rural areas continued to be above those in urban India.

Factory output contracted for the third consecutive month in December, suggesting that a recovery continues to elude Asia’s third largest economy. Industrial output fell 0.6% in December from a year earlier, after contracting by 1.3% in the preceding month, according to data from the statistics ministry. Analysts polled by Reuters had forecast a contraction of 1% in industrial output.

The manufacturing sector contracted 1.6% in December, even as mining and electricity production expanded at 0.4% and 7.5%, respectively.

Output in the capital goods segment, a key indicator of investment demand in the economy, contracted 3% in December. Basic goods and intermediate goods production expanded 2.4% and 4.5%, respectively.

India has been battling both inflation and slowing growth in the last two years. While inflation has been declining in recent months on the back of falling vegetable and fruit prices, the growth outlook has been weak, led by a slowdown in manufacturing.

High inflation levels were attributed as one of the major reasons for the poor showing of the Congress party-led United Progressive Alliance’s drubbing in the assembly elections for four states in November. Slower-than-expected retail inflation could provide the central bank more room to move towards an easy money policy. The Reserve Bank of India (RBI) had flagged the high CPI inflation levels while increasing the policy rate by 25 basis points in its third-quarter review of the monetary policy. A basis point is one-hundredth of a percentage point.

It had said that if inflation eases at a faster pace than expected, the central bank will have room to become more accommodative. The Urjit Patel Committee, in its report, had targeted a CPI inflation level of below 8% by January 2015 and below 6% by January 2016.

A note by Crisil Research said a firm commitment of the central bank to lower CPI inflation to 6% by 2016 will imply little room for monetary policy loosening in the next fiscal year, despite weak domestic demand.

But economic recovery continues to be fragile. Data recently released by the statistics ministry revised downwards the growth of gross domestic product (GDP) to a nine-year low of 4.5% in the fiscal year ended March 2013 from 5%. Growth is expected to recover only slightly to 4.9% in 2013-14, with manufacturing expected to decline 0.2% in the fiscal. Clocking the slowest growth since 1997-98, manufacturing growth had tanked to 1.1% in 2012-13 from 7.4% in 2011-12.

Expressing a grim economic outlook, RBI had said that growth is likely to lose momentum in the third quarter of the current fiscal with industrial activity in contractionary mode, mainly on account of manufacturing, and services also expected to witness subdued growth. “The slowdown in the economy is getting increasingly worrisome,” the central bank had said.

Analysts said the central bank may maintain a status quo in rates in the near term.

“If there are no shocks as far as commodity and food prices are concerned and there is a normal monsoon, retail inflation could ease to around 8% over the next 12 months, along the line of the trajectory indicated by the Urjit Patel Committee report. However, core inflation is likely to display a limited moderation and will remain a cause of concern”, said Aditi Nayar, senior economist at Icra Ltd.

Nayar said that RBI may maintain a status quo on repo rate in the next policy review, with data in the coming months deciding the monetary policy trajectory.

She said that though manufacturing growth is expected to remain flat this fiscal, there may be muted growth of around 3% in 2014-15. “In addition to a moderate expansion of merchandise exports, some sectors like passenger vehicles and medium and heavy commercial vehicles are likely to record positive growth next fiscal based on some improvement in domestic demand following the sustained contraction in the current fiscal,” she said.

“What is clear is that high consumer price inflation and relatively low urban wage increases have badly impacted urban demand from the middle and lower middle classes,” said Pronab Sen, chairman of the National Statistical Commission.

Consumer durable units lowered production by 16% in December over the year ago level. In the 10 months to December 2013, consumer durable production fell 13% over the previous April-December period. Consumer non-durable units, however, increased production by 1.6%.

Sen said the rise in the production of small scale units was probably not as affected as that of the larger units.

“If small scale units grow, they pull up growth in basic and intermediate goods producing units. This is happening, but not affecting the general index because the small scale is not covered at all in IIP (Index of Industrial Production),” Sen said.

In the year to December, production shrank the most in units producing polythene bags (58.4%), aluminium conductors (55.9%), telephone instruments including mobile phone accessories (39%), boilers (39%), earth-moving machinery (38%), and gems and jewellery (33%).​Trade data released on Tuesday had showed gems and jewellery exports, among the top exports of India, fell 13.13% in January.