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Demonetization lingers as IIP contracts in February

The biggest positive contributors to the IIP were apparel, steel, minerals and rubber products, while the negative contributors were sugar, cement, plastic machinery and pan masala cigarettes

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Decline in manufacturing and capital and consumer goods, hit the Index of Industrial Production (IIP) slipping to four-month low, contracting 1.2 % in February. The same time last year, IIP had registered a growth of 1.99%, capital goods also fell 3.4%. The segment which is highly volatile in the IIP, had grown 10.7% in January after a fall of 3 % in December.

The biggest positive contributors to the IIP were apparel, steel, minerals and rubber products, while the negative contributors were sugar, cement, plastic machinery and pan masala cigarettes.

Upasna Bhardwaj, senior economist, Kotak Mahindra Bank said, "Weak factory output in February continues to point towards the fact that the disruption to demonetization-led economic activity, is yet to be arrested."

The year-to-date growth in IIP was just 0.4% as against 2.6% a year ago. CPI inflation increased to a five-month high of 3.81% in March 2017, compared to 3.65% in February 2017.

Consumer products and fuel prices drove up Consumer Price Inflation (CPI) to a five-month high of 3.81%. But, experts say it is unlikely to go beyond 4%.

Rating agency Crisil said the consumer price inflation was driven by rise in prices of housing, fuel, clothing and footwear. Fuel inflation like petrol, diesel, fuel and light, jumped 1.90% over the preceeding month.

SBI Ecowrap said in a report, "Increase in CPI was expected primarily due to moderate increase in prices of fruits (9.3%), sugar (17.0%) and Pan, tobacco (6.2%). Vegetable prices are in negative territory for the seventh-straight month in March 2017 also, though the magnitude has declined considerably. Pulse prices have also shown declining momentum. Interestingly, vegetables' and pulse prices' inflation expectations are significantly lower than the market expectations. But, our internal estimate suggests that CPI inflation is unlikely to breach the 4% mark in 2017.

The IIP has been swinging in and out of negative territory. The 2% contraction in manufacturing which constitutes 75% of the index led to the fall in the IIP. Capital goods, the other segment that dragged down IIP, declined 3.4%, and the consumer goods production declined 5.6% during the month.

SBI Ecowrap said, "Since August 2016, IIP has been oscillating between positive and negative zones alternatively. For February 2017, IIP plunged into negative zone and declined in manufacturing. Mining and electricity grew 3.3% and 0.3% (six-month low), respectively.

However, electricity generation was up 0.3%, as against a 3.9% rise in January. Similarly, the mining sector also maintained the growth trend, going up 5% in February, as compared to 5.3% rise in the previous month.

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