NEW DELHI: Industrial production contracted at a slower pace in August than in the month before as the economic recovery gathered pace. However, retail inflation climbed to an eight-month high in September, driven by higher food prices, potentially delaying further monetary easing.
Industrial production, as measured by the index of industrial production (IIP), shrank 8% in August with all its constituents contracting against a 1.4% decline in the same period last year. Revised data showed industrial production contracted 10.7% in July and 15.7% in June. Earlier estimates had shown IIP shrinking 10.4% in July.
Retail inflation accelerated to 7.34%, exceeding the target rate, in September from 6.69% on dearer food inflation that reached the double-digit level of 10.68%.
Steepest decline in capital goods
In the first five months of FY21, India's factory output shrank 25% compared with 2.4% growth in the year-ago period.
"Though economic activities are yet to reach the pre-Covid-19 level, it is gaining traction with each passing month, albeit at a reduced pace," said India Ratings principal economist Sunil Kumar Sinha.
Manufacturing, mining and electricity contracted 8.6%, 9.8% and 1.8%, respectively.
While all IIP subsectors were deep in the red, capital goods - an indicator of investment--witnessed the steepest decline of 15.4%. Barring tobacco products, basic metals and transport equipment, the other 20 manufacturing subsectors reported a contraction in August. Consumer durables production, an indicator of urban demand, declined 10.3%. Consumer nondurables shrank 3.3%.
Other data released on Monday showed the economy gathered pace in September after plateauing in August. Goods and services (GST) tax collections, power demand and e-way bills were among a number of indicators that were higher in September from a year ago.
The contraction in industrial production is expected to narrow further in September on course to possible positive growth in October because of festive spending and stimulus measures announced by the government on Monday.
Food inflation
Food inflation was driven by inflation in vegetables at 20.73% in September compared with 11.4% in August. Inflation in fruits stood at 3.21% against 1% last month. Clothing and footwear inflation was at 3.04% in September, housing inflation at 2.83%, and fuel and light inflation was 2.87%.
Inflation based on the consumer price index (CPI) is well above the 6% outer band of the central bank's inflation target of 2-6%.
"The CPI inflation hardened beyond our expectations to an eye-watering 7.34% in September 2020," said ICRA principal economist Aditi Nayar. Inflation should cool as the winter crop arrives and the high base effect kicks in, she said.
"With expectations of firming inflation at the retail level for next couple of months, it is unlikely for the RBI to lower rates in December," CARE Ratings said in a note.
The Reserve Bank Monetary Policy Committee kept the repo rate unchanged at 4% last week. The RBI expects India's GDP to contract by 9.5% in the current fiscal year due to the disruptions caused by the Covid-19 pandemic. India's April-June gross domestic product (GDP) contracted 23.9%, the sharpest decline among major economies.
Industrial production, as measured by the index of industrial production (IIP), shrank 8% in August with all its constituents contracting against a 1.4% decline in the same period last year. Revised data showed industrial production contracted 10.7% in July and 15.7% in June. Earlier estimates had shown IIP shrinking 10.4% in July.
Retail inflation accelerated to 7.34%, exceeding the target rate, in September from 6.69% on dearer food inflation that reached the double-digit level of 10.68%.
Steepest decline in capital goods
In the first five months of FY21, India's factory output shrank 25% compared with 2.4% growth in the year-ago period.
"Though economic activities are yet to reach the pre-Covid-19 level, it is gaining traction with each passing month, albeit at a reduced pace," said India Ratings principal economist Sunil Kumar Sinha.
Manufacturing, mining and electricity contracted 8.6%, 9.8% and 1.8%, respectively.
While all IIP subsectors were deep in the red, capital goods - an indicator of investment--witnessed the steepest decline of 15.4%. Barring tobacco products, basic metals and transport equipment, the other 20 manufacturing subsectors reported a contraction in August. Consumer durables production, an indicator of urban demand, declined 10.3%. Consumer nondurables shrank 3.3%.
Other data released on Monday showed the economy gathered pace in September after plateauing in August. Goods and services (GST) tax collections, power demand and e-way bills were among a number of indicators that were higher in September from a year ago.
The contraction in industrial production is expected to narrow further in September on course to possible positive growth in October because of festive spending and stimulus measures announced by the government on Monday.
Food inflation
Food inflation was driven by inflation in vegetables at 20.73% in September compared with 11.4% in August. Inflation in fruits stood at 3.21% against 1% last month. Clothing and footwear inflation was at 3.04% in September, housing inflation at 2.83%, and fuel and light inflation was 2.87%.
Inflation based on the consumer price index (CPI) is well above the 6% outer band of the central bank's inflation target of 2-6%.
"The CPI inflation hardened beyond our expectations to an eye-watering 7.34% in September 2020," said ICRA principal economist Aditi Nayar. Inflation should cool as the winter crop arrives and the high base effect kicks in, she said.
"With expectations of firming inflation at the retail level for next couple of months, it is unlikely for the RBI to lower rates in December," CARE Ratings said in a note.
The Reserve Bank Monetary Policy Committee kept the repo rate unchanged at 4% last week. The RBI expects India's GDP to contract by 9.5% in the current fiscal year due to the disruptions caused by the Covid-19 pandemic. India's April-June gross domestic product (GDP) contracted 23.9%, the sharpest decline among major economies.
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21 Comments on this Story
 | King9 hours ago Did you know that your mind has a 'mind' of its own? Yes! Without even realizing, our mind is often governed by another entity which is called the sub-conscious mind. https://amzn.to/3nQfC9F |
| KD 9 hours ago India is facing classic stagflation kind of a scenario. Government should very deeply think and get Expert Opinion from Niti Aayog before bringing policies like vehicle scrappage policy. |
| Ron 10 hours ago yashodhan....this is an information. Seeing green shots or recovery means demad is rising and is inflation rising due to less supply....get some knowledge n sense.... simple telling senseless anti national.... |