Inflation measured by the Consumer Price Index (CPI) slipped below the central bank’s lower tolerance level to 1.54% in June and industrial output growth decelerated to 1.72% in May, prompting Chief Economic Advisor (CEA) Arvind Subramanian to hint at the need to reboot monetary policy assumptions including ‘systematic inflation forecast errors’ he had red-flagged earlier.
“The number of 1.54% is historically low and reflects the firm and ongoing consolidation of macro-economic stability,” Mr. Subramanian said soon after the data was released. “The last time we saw such inflation — according to a slightly different CPI series (IW) — was in 1999 and before that in August 1978.”
Retail inflation slowed for the third straight month, largely driven by a 1.17% contraction in food prices. Growth in the Index of Industrial Production (IIP) slowed for the second consecutive month, with consumer durables’ production contracting by 4.55% in May, following April’s 6.05% contraction.
“This low, heartening (CPI) number is consistent with our analysis for some time now — and which will be fully elaborated in the forthcoming Survey — of a paradigm shift in the inflationary process to low levels of inflation, a shift that I think has been missed by all, reflected in the large one-sided, and systematic inflation forecast errors that have been made,” Mr. Subramanian said.
“Clearly, this low number and what it implies about underlying price pressures — as well as the latest IIP data just released — is something that, I am sure, all policy makers will reflect upon very, very carefully,” he said.
‘Deflationary trends’
Sanjeev Sanyal, Principal Economic Advisor, in the Department of Economic Affairs tweeted: “I share @arvindsubraman’s concerns about deflationary trends. Policymakers should follow real data rather than error prone forecasting models.”
Inflation in clothing and footwear slowed to 4.17% from 4.4% in May, while the fuel and light category witnessed a sharper slowdown, with the reading easing to 4.54% from 5.46%.
“The trends in the overall consumer price index and in food prices were expected, but have been sharper than anticipated,” D.K. Srivastava, Chief Policy Advisor at EY India said. “In my view, it is the outcome of demand and supply factors. Demand is subdued and supply is buoyant. That is why there is a sharp downward trend.”
The housing segment also saw inflation slowing to 4.7% from 4.84%., while inflation in the pan, tobacco and intoxicants category slowed to 5.62% in June from 6.17%.
In the IIP, mining and quarrying witnessed a sharp slowdown in May, contracting 0.89% from a growth of 3.23% in April. Manufacturing activity also slowed to 1.21% from 2.35%. “The subdued growth in manufacturing is worrying as some of the major sectors like capital goods, automobiles and textiles have shown degrowth,” A Didar Singh, Secretary General of FICCI said.
The electricity sector was one of the few to witness an uptick in activity, growing by 8.7% in May from 5.39% in April, though experts say this could be due to seasonal factors.
“The slowdown in the IIP is likely due to uncertainty relating to GST (Goods and Services Tax) as well as subdued demand,” Mr Srivastava added. “The effect of demonetisation is now ebbing out, but there is a general weakness in private demand, which might be independent of any effect of demonetisation.”
“This further underlines the need for major reforms to improve the investment climate further. In view of the fall in consumer durable growth, reducing interest rates would help in stimulating demand and also reviving investments.”