Slow growth: No clear signs of industrial revival

While the finance ministry in a recent report saw prospects of a revival of the investment cycle, this was not corroborated by the latest data on industrial production; capital goods output grew only marginally in September.

Retail inflation inched up to 4.48% in October from a six-month low of 4.35% in September but remained within the central bank’s target band (2-6%) for a fourth straight month, showed official data released on Friday.

The growth in the index of industrial production (IIP) slowed to 3.1% in September from 12% in the previous month, as the impact of the low base waned. But the IIP still turned out to be 5.7% higher than the pre-pandemic (September 2019) level, suggesting industrial activity may be gradually returning to normalcy, though a sustained recovery is still away.

While the finance ministry in a recent report saw prospects of a revival of the investment cycle, this was not corroborated by the latest data on industrial production; capital goods output grew only marginally in September.

The rise in inflation in October, albeit marginal, remained broad-based and pointed at revival of demand ahead of the peak festival season, which may have allowed producers in select sectors to pass on the spurt in input costs. However, given the recent cut in fuel taxes by the Centre and about two dozen states, inflationary pressure is expected to drop in November. This will ease pressure on the central bank for any early liquidity normalisation (in December meeting), and its accommodative stance could continue for a longer time despite external headwinds.

The global commodity prices, especially of oil, have been on the rise and the US Federal Reserve has signalled its intent to start scaling back its $120 billion-a-month quantitative easing later this year. Interestingly, US inflation hit a 31-year high of 6.2% (much higher than India’s) in October, reflecting rising global commodity prices, persistent supply shortages and strong consumer demand.

Inflation in food products, which make up for about a half of the inflation basket, rose a tad to 0.85% in October from 0.68% in September but fuel and light inflation continued to stay elevated at 14.35%, against 13.63% in the previous month. Core inflation remained sticky at 5.8% in October, against 5.6% in the previous month. The excise duty cut by Rs 5 per litre on petrol and Rs 10 on diesel by the Centre and the reduction in value added taxes by many states in November will likely weigh down indirect price pressure (in transportation, etc) emanating from fuel.

Capital goods output grew just 1.6% in September against 19.9% in the previous month. Consumer goods output shrank even ahead of Diwali. While consumer durables output contracted by 2%, non-durables dropped 0.5%.

Barring mining, which grew 8.6% in September, the growth of manufacturing and electricity remained lower than expected at 2.7% and 0.9%, respectively. Heavy remains seem to have impacted industry adversely while chop shortage has hit auto units.

Aditi Nayar, chief economist at Icra, said the direct impact of the reduction in central excise duty on fuel on the November CPI inflation could be about 30-35 basis points, with a somewhat smaller impact of the varied VAT cuts by states.

“As the base effect wears off, and the pressures related to coal, metals and logistics costs come to the fore, we expect the CPI inflation to return to an uncomfortable range of 5.0% to 6.0% in December-March this fiscal,” Nayar said.

DK Pant, chief economist at India Ratings, said both consumer durables and non-durables recorded negative growth in September from a year before. “This shows that despite the onset of the festival season, the industrial output has remained subdued,” he said. However, this appears to be in contrast with the recent retail sales figures reported in the media.