IIP growth rebounds to 7.1% in Nov; retail inflation eases to 5.7% in Dec

IIP growth rebounds to 7.1% in Nov; retail inflation eases to 5.7% in Dec

Shiva Rajora & Asit Ranjan Mishra

New Delhi, 12 January

India’s factory output rebound to a five-month high in November and retail inflation eased marginally to a 12-month low in December, providing the much-needed comfort to the government. These will be the final set of key macro indicators available to Finance Minister Nirmala Sitharaman as she prepares to present Budget 2023-24 on February 1.

Data released by the National Statistical Office showed Consumer Price Index-based inflation rate at 5.72 per cent remained below the Reserve Bank of India’s (RBI’s) upper tolerance limit of 6 per cent for the second consecutive month in December due to continued moderation in food prices.

Meanwhile, factory output, measured through the Index of Industrial Production (IIP), grew at a robust 7.1 per cent in November, mostly due to a favourable base effect. While the mining and manufacturing sectors grew 9.7 per cent and 6.1 per cent, respectively, in November, electricity output clocked double-digit growth at 12.7 per cent.

The food inflation rate fell to 4.19 per cent in December, from 4.67 per cent in November, driven by vegetables (minus 15.08 per cent), fruit (2 per cent), and prepared meals (7.76 per cent).

However, the inflation rate for meat and fish (5.13 per cent), eggs (6.91 per cent), cereals (13.79 per cent), milk products (8.51 per cent), pulses (3.89 per cent), and spices (20.35 per cent) accelerated during the month. However, core inflation — that excludes volatile food and fuel items — remained above 6 per cent in December, even after marginal deceleration.

RBI Governor Shaktikanta Das in his latest monetary policy statement had expressed concern over “sticky and elevated” core inflation, holding that the battle against inflation was not over yet.

Retail inflation had been above the 6 per cent mark for three consecutive quarters, forcing the central bank to go on a rate-hike spree, as the six-member Monetary Policy Committee (MPC) hiked the lending rate by 225 basis points (bps) since May to 6.25 per cent in its last meet in December — the highest level since February 2019.

Madan Sabnavis, chief economist, Bank of Baroda, believes the RBI will increase rates in the upcoming February policy meeting by another 25 bps. This may be the last hike for this cycle, as the numbers in the months to come are expected to come down due to the base effect.

Aditi Nayar, chief economist at ICRA, however, believes the MPC may choose to pause its rate-hike cycle in February, taking into account the lower-than-expected retail inflation print and muted average IIP growth of 1.3 per cent during October-November 2022.

Unlike previous few months, all segments at the use-based classification of IIP recorded positive growth in November.

After a gap of three to four months, consumer durables (5.1 per cent) and non-consumer durables (8.9 per cent) returned to positive growth, respectively.

The volatile capital goods that represent investment demand in the economy grew at a robust 20.7 per cent in November, as did infrastructure goods (12.8 per cent), as the government continued to push capital expenditure through higher public investment.

However, seven of 23 sectors, such as tobacco (minus 5 per cent), textile (minus 9 per cent), apparel (minus 11.7 per cent), leather (minus 2 per cent), wood (minus 0.5 per cent), paper (minus 2.3 per cent), refined petroleum (minus 9.8 per cent), contracted in November.

Sunil Kumar Sinha, principal economist at India Ratings & Research, believes recovery in factory output has a long way to go, notwithstanding the encouraging IIP print.

“At the use-based classification, even now the output levels of two segments, that is intermediate goods and consumer durables, are less than pre-Covid (February 2020) output levels. Therefore, the ongoing industrial recovery will continue to need more policy support,” he added.