Opinion Good auguries: Inflation falls while industrial output rises

On Thursday, the National Statistical Office released data on inflation and industrial production in the economy. According to this data, retail inflation, as measured by the consumer price index, continued to trend lower, declining to 5.72 per cent in December, from 5.88 per cent in November. With this, inflation has now stayed below the upper threshold of the Reserve Bank of India’s inflation targeting framework for two continuous months after breaching the threshold for several months earlier. Alongside, the data also shows that industrial output grew by a healthy 7.1 per cent in November, reversing the contraction seen in the month before. For the first eight months of the year (April-November), industrial production has grown by 5.5 per cent. These are encouraging signs on the state of the economy.

Headline retail inflation has fallen from 7.3 per cent in the first quarter to 7.04 per cent in the second quarter, falling further to 6.1 per cent in the third quarter. The disaggregated inflation data shows that the recent decline has largely been driven by lower food inflation. The consumer food price index fell to 4.19 per cent in December, from 4.67 per cent a month ago, with vegetables witnessing a steep decline. However, core inflation continues to remain a source of concern. Inflation remains elevated in clothing and footwear, household goods and services, education and health and personal care. As per some analysts, the continuing pass-through of input costs by producers, and healthy demand for services suggests that core inflation is likely to be sticky. The data on industrial production shows a sharp uptick across all segments. Manufacturing is up 6.1 per cent, while electricity has grown at almost twice that pace. Both the consumer durables and non-durables category have also seen a healthy uptick. However, considering the volatility in these segments, the lagged impact of domestic policy tightening and the slowdown in external demand, it is difficult to know whether this reflects a more sustained, broad-based pickup in industrial activity.

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In a few weeks, Finance Minister Nirmala Sitharaman will present the Union budget for 2023-24. Subsequently, the monetary policy committee will meet for the first time in 2023. Considering the global and domestic macroeconomic environment, the driving consideration for fiscal and monetary policy must be to preserve macroeconomic stability.