Double whammy of rising inflation and falling IIP

Two sets of recently released numbers suggest the applause for an economic turnaround may have been a wee bit too early. The National Statistical Office (NSO) said last week that India’s retail inflation rose to 5.03% in February, mainly driven by higher food and fuel prices. Food inflation alone went up steeply to 3.87% in February, doubling the 1.89% inflation rate for the previous month. The Consumer Price Index (CPI)-based inflation was 4.06% in January 2021 and 6.58% in February 2020. Simultaneously, the Index of Industrial Production (IIP) contracted by 1.6% in January on the back of a poor performance by the mining and manufacturing sectors, surprising analysts. Bloomberg for instance had estimated a 1% growth.

These reversing trends could not have come at a worse time. We are currently seeing a spike in Covid-19 infections throughout the country, with industrial hubs like Maharashtra, Karnataka and Delhi showing a steady climb. Restrictions are back in place in many centres, with actual lockdowns being imposed in cities like Nagpur and some districts in Punjab. This will put the brakes on what can only be described as a tepid recovery.

The graph of industrial growth numbers suggests that the recovery has been weak and is facing strong headwinds. Predictably, the IIP continued to contract from March to August 2020 during the height of the lockdown. As things opened up, there was positive growth in September and October last year. However, the IIP contracted in November and showed a marginal growth of 1.6% in December last. Now in January it is down again, with manufacturing contracting 2% and mining 3.7%. This shows there is not much depth in our industrial recovery. This is bad news for a nation fighting joblessness. The biggest surprise was that consumer durables production fell 0.2% while consumer non-durables crashed 6.8%, showing poor recovery of demand. On the other front, retail inflation hitting a three-month high of 5.03% has been stoking fears of a further rise in bond yields and increase in interest rates. The country can ill afford these speed breakers to growth.