Industrial production grew 4.3% in August, the fastest in five months, as inventory replenishment after the clearance of pre-GST stocks to cater for an early Diwali demand boosted manufacturing.
Also, retail inflation remained unchanged at 3.28% in September, as higher fuel and HRA-induced housing inflation offset a moderation in price pressure in food items, showed official data released on Thursday. Core inflation — which had spiked as much as 50 basis points sequentially in August, much to the concerns of policy-makers — stayed almost flat at 4.5% in September.
Rising industrial output and steady inflation would mean another round of pause on the rate cut by the monetary policy committee, said analysts. The average headline retail inflation in the first half of this fiscal remained well within the Reserve Bank of India’s projected range of 2-3.5%.
What was remarkable about the index of industrial production (IIP) data was that while a decent expansion in mining and electricity was aided by base effect and good performances by the coal and thermal electricity segments, manufacturing output surged despite a damaging base (it had risen as much as 6.6% in August last year). As for use-based industries, the fact that consumer non-durables grew 6.9% on an unfavourable base (it had grown 11.9% a year earlier) while durables expanded just 1.3% suggests rural demand is possibly recovering faster than urban consumption. Although notorious for fluctuation, capital goods rose 5.4% in August, the highest since March, reflecting improved investments scenario.
“On a cautious note, this uptick in industrial growth may not sustain in September, with the early indicators for industrial production in the organised sectors, namely, automobiles, coal and electricity generation, revealing some moderation in the pace of expansion from the spikes recorded in August,” said Aditi Nayar, principal economist at Icra. Even the base remains unfavourable at least until November.
Nevertheless, with consumption getting a festive push, export markets picking up and the goods and services tax (GST) regime stabilising after initial disruptions, the analysts feel manufacturing may not plunge drastically in the coming months, despite these risks.
Rupa Rege Nitsure, group chief economist at L&T Finance Holdings, said the sequential slowdown in CPI (it had risen close to a percentage point in August from July) despite low base reflects “weaknesses in aggregate demand”. Even services inflation has moderated marginally, she added.
However, the recent cut in central excise duty on petrol and diesel by Rs 2 per litre, and the subsequent reduction in value-added taxes on these items by some state governments, including Gujarat, would dampen price pressure in fuel and “transport and communication” in October.
Although prices of some vegetables, mainly tomatoes, have eased this month and could put a lid on food inflation, the estimated drop in kharif harvest, coupled with the persistence of an unfavourable effect, could weigh on prices in the coming months, more so when the harvesting season is over by December.
Also, the staggered impact on the housing index of the CPI, of the revision in HRA of Central government employees, is likely to push up housing inflation further over the coming year, said Icra’s Nayar. Moreover, the pass-through of the GST to final prices of various goods and services may not be complete.
The RBI this month raised its inflation target to 4.2-4.6% for the second half of this fiscal from 4-4.5% announced earlier, while it had projected 2-3.5% for the first half. Its medium-term inflation target is 4%+/-2 percentage points.