Inflation rises, industrial growth decelerates
The Index of Industrial Production and inflation have shown lacklustre performance with industrial growth plummeting to 0.1% in March and inflation soaring to 5.39% in April. The decline in production is due to a poor performance in manufacturing and mining sectors while the inflation has risen on account of higher food prices. This has reduced the chances of a rate cut by the RBI.
What is IIP?
Index of Industrial Production (IIP) is an economic indicator that measures the growth rates in different industry groups of the economy. The groups, comprising 682 items are classified as broad sectors consisting of mining, manufacturing and electricity; and user based sectors consisting of basic goods, capital goods and intermediate goods. It is released every month by Central Statistical Organization (CSO) with base year 2004-05.
What is inflation?
Inflation is the sustained increase in general price levels. In India, it is measured as Consumer Price Index (CPI) and Wholesale Price Index (WPI). CPI measures the change in prices of goods and services that households use for consumption. Released monthly by CSO, it is used by the RBI to decide monetary policy. WPI measures prices of goods at the wholesale stage.
Inflation inches up for fifth month
Inflation rose for a consecutive fifth month to 5.61% in Dec'15 up from 5.41% in Nov'15. The rising inflation not only negates the possibility of an interest rate decline by RBI to spur investments, but also restricts fiscal spending by the central government to boost the economy. The twin problems of declining IIP and rising inflation pose many challenges for policy makers.
Food inflation persists
2015 Inflation data shows that the price of pulses was up by almost 46% from the previous year and food inflation also rose to 6.4% in December 2015 from 6.07% in November 2015.
IIP contracts 3.2% in Nov 2015
The November factory output measured by Index of Industrial Production (IIP) registered an unexpected decline of 3.2% from the corresponding Nov'14 figure. This represented the other extreme as Oct 2015 data had shown a rise of 9.8% over Oct 2014. Nov 2015 IIP data which was the worst performance of IIP since Oct 2011 had raised questions over the recovery of the industrial sector.
Not too much to worry
Many experts attributed the decline in Nov'15 IIP to the Chennai floods and Diwali. The Chennai floods caused many factories around Chennai to shut down, severely affecting industrial output from the southern manufacturing hub. The festival season in October and November, including Ramzan, Diwali and Navratri had led to many public holidays, which also affected factory output. Experts expect consumption to drive future growth.
Consumption driving growth
Passenger car sales had breached the 2 million mark for the first time in 2015 (Jan- Dec'15) and registered almost a 10% increase in sales over the previous year.
IIP contracts 3rd time in a row at 1.5%
Factory output (IIP) declined by 1.5% for the third consecutive month in January (3.2% and 1.2% for November and December respectively). The contracted IIP was due to a sharp slump in production of capital goods and consumables, indicating a vulnerable growth momentum. The production sector, which accounts for over 75% of the index, contracted by 2.8% against an increase of 3.4% in January 2015.
IIP makes U turn rises in February
After 3 months of contraction, IIP rose by 2% in Feb'16 due to a strong performance by electricity (9.6%) and mining (5%) sectors. The retail inflation moderated to 4.83% from 5.26% a month ago with food inflation also falling to 5.21% from 5.3% during the same period. RBI had on 5th April slashed the policy rates by 25 basis points to increase liquidity.
Assocham prescribes solution
"Widespread drought has definitely affected the food prices sending the CPI upwards, hoping normal monsoon should bring in comfort level. The government must also front-load its capital expenditure for the fiscal 2016-17 to stimulate the economy." - Sunil Kanoria, Assocham President.