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Tuesday, December 01, 2020

Industrial production contracts for third straight month in October, inflation spikes to 5.54% in November

Factory output, measured in terms of Index of Industrial Production (IIP), had expanded by 8.4 per cent in October 2018. Meanwhile, riding on the back of higher food prices, retail inflation rose to over three-year high of 5.54 per cent in November. 

By: Express Web Desk | New Delhi | Updated: December 12, 2019 8:16:44 pm
The IIP in October 2019 stands at 127.7, down 3.8 per cent from October 2018. (Representational image)

Contracting for the third consecutive month, factory output for October declined by 3.8 per cent, with all three sectoral constituents — manufacturing, mining and electricity — recording negative growth, data released by Ministry of Statistics and Programme Implementation (MoSPI) showed on Thursday. Meanwhile, riding on the back of higher food prices, retail inflation rose to over three-year high of 5.54 per cent in November.

Factory output, measured in terms of Index of Industrial Production (IIP), had expanded by 8.4 per cent in October 2018.

The manufacturing sector, which carries a weight of 77.63 per cent in the Index of Industrial Production (IIP), contracted for the third month in a row by 2.1 per cent in October compared to a 8.2 per cent growth last year, while mining sector output, with a weight of 14.37 per cent in the index, contracted 8 per cent as against 7.3 per cent growth in the corresponding period last fiscal.


What is the IIP?

As the name suggests, the Index of Industrial Production (IIP) maps the change in the volume of production in Indian industries. More formally, it chooses a basket of industrial products — ranging from the manufacturing sector to mining to energy, creates an index by giving different weight to each sector and then tracks the production every month. Finally, the index value is compared to the value it had in the same month last year to figure out the economy’s industrial health.

Power sector growth declined by 12.2 per cent in October this year, as compared to a 10.8 per cent rise last year. Capital goods production, which is a barometer of investment, declined by 21.9 per cent in October compared to 16.9 per cent rise in the year-ago month.

The consumer durables and consumer non-durables have recorded growth of (-) 18 per cent and (-) 1.1 per cent, respectively. In terms of industries, 18 out of 23 industry groups in the manufacturing sector have shown negative growth during October 2019 as compared to the same month last year.

Retail inflation touches 3-year high of 5.54% in November

Meanwhile, data released by the National Statistical Office (NSO) showed retail inflation touching a three-year high of 5.54 per cent in November. The inflation based on the Consumer Price Index (CPI) was 4.62 per cent in October, and 2.33 per cent in November 2018.

Data revealed that inflation in food rose to 10.01 per cent. This compares with 7.89 per cent October and (-) 2.61 per cent in the year ago-month. The previous high of CPI was 6.07 in July 2016. The Reserve Bank of India has been mandated by the government to contain inflation in the range of 4 per cent.

How analysts reacted

“The inflation rate at 5.54 per cent is heading towards the upper limit set by the RBI at 6 per cent. However, this surge in inflation was expected with the skyrocketing prices in vegetables, as food and beverages have a share of around 45 per cent in the Consumer Price Index (CPI). The worrying fact is the low core inflation rate that is not showing any signs of improvement at 3.5 per cent. It reflects the tepid demand in the economy,” Deepthi Mary Mathew, Economist at Geojit Financial Services said.

“At over 5.5% retail inflation is clearly much ahead of our expectations. But this is again due to the non-core part, mainly vegetables. Core inflation remains benign and trending downwards. The IIP number, although in negative, is better than expected given that in Oct’19 there are several holidays when factories were shut. This reflects a reasonably good festive sales and perhaps clearing of inventories. While a large part of food inflation is likely to soften over the next two months, we expect the trend inflation to remain elevated. Average inflation in 2020 at 4-4.5% range would be much higher than in 2019. With the likely bottoming of growth and elevated inflation as well as concerns on large fiscal slippages, the policy rate may remain in hold in FY20,” Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers wrote in a reaction to the inflation data.

“India’s Nov inflation has surged to 40-month high of 5.54%, that is a 130bps higher than RBI’s medium-term target of 4%. This is mainly due to substantial increase in food prices. While Oct IIP print still remains in contraction at -3.8%. At this month’s policy, RBI refrained from cutting rates due to uptick in CPI despite a slow growth. If inflation continues to rise further than RBI may continue to maintain a pause at the Feb policy,” Rahul Gupta, Head of Research – Currency, Emkay Global Financial Services said.

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