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Low base effect pushes up IIP; cheaper food cools inflation

Manufacturing sector output surged 25.8 per cent in March 2021, while mining output rose 6.1 per cent and power generation increased by 22.5 per cent in March.

By: ENS Economic Bureau | Mumbai |
Updated: May 13, 2021 4:00:43 am

India’s industrial production grew by 22.4 per cent in March on the back of a low base effect from last year when the country had enforced nationwide lockdown to counter the spread of Covid-19 pandemic, data released by National Statistical Office (NSO) on Wednesday showed. Index of Industrial Production (IIP) had recorded a contraction of 18.7 per cent in March 2020.

Cumulatively, the industrial output recorded a contraction of 8.6 per cent in 2020-21 as against a contraction of 0.8 in 2019-20. Before the impact of the second wave of the pandemic, the index value of the IIP, however, showed improvement on a sequential basis, rising to 143.3 in March from 129.6. At these levels, the IIP is 0.5 per cent lower than the pre-pandemic level of 144.1 in March 2019.

Manufacturing sector output surged 25.8 per cent in March 2021, while mining output rose 6.1 per cent and power generation increased by 22.5 per cent in March.

Going ahead, IIP is likely to take a hit due to the impact of the second wave of the pandemic, economists said. “In level terms the factory output in March 2021 is 106.9% of the pre-COVID period (February 2020). At broad based classification the manufacturing, electricity and mining output came in at 104.6%, 117.1% and 112.7% of the pre-COVID period… now with the second wave of COVID pandemic and associated local/partial lockdowns/curfew, it is unlikely that factory output will get any better in the near term. It is quite likely that there would be an adverse impact on the factory output over the next few months, yet the factory output on yoy terms would look good in 1QFY22 mainly due to the base effect,” Devendra Kumar Pant, Chief Economist, India Ratings & Research said.

Expained

Weak demand conditions

Weak demand conditions have started reflecting in economic data. Retail inflation rate eased despite impact of higher fuel prices as core inflation — the non-food, non-fuel inflation component — which declined to a 10-month low of 5.43 per cent in April.

Separately released data on inflation showed retail slowing to 4.29 per cent in April from 5.52 per cent in March, mainly due to lower food prices. Food inflation rate eased to 2.02 per cent in April from 4.87 per cent in March this year.

The low food inflation was primarily led by deeper deflation in cereals and products to (-)3.0 per cent in April from 7.8 per cent in April last year and higher sequential deflation in vegetable prices to (-)14.2 per cent in April as against 23.6 per cent in April last year. Higher inflation was recorded in April for fuel and light at 7.9 per cent and health at 7.8 per cent. Health inflation has increased sharply due to COVID related expenses and has been more than 5 per cent since October 2020.

Weak demand conditions have started reflecting in core inflation — the non-food, non-fuel inflation component — ,which declined to 10-month low of 5.43 per cent in April.

“This fall is in spite of an increase in the inflation rate in the category of fuel and light. This pattern is indicative of the fact that while a cost push inflation is still operating through petroleum prices, lower demand for food and beverages, clothing and footwear, transport and communications and miscellaneous goods have driven the overall inflation down. The policy message is that the government needs to support demand without getting excessively concerned about the pressure on prices of petroleum products,” D K Srivastava, Chief Policy Advisor, EY India said.

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