IIP slump, inflation rise despite RBI's rate cut worrisome, say experts

Of the two not-so-heartening economic data – 5% retail inflation in October and 3.6% factory output growth in September compared with 4.4% and 6.2% respectively in the earlier months – published by the government, the economists felt the latter was more a "matter of concern" than the former. D K Srivastava, chief policy advisor, EY, said inflation was expected to go up in October due to the base effect coming off, but a lower industrial production number, despite monetary stimulus, was symptomatic of a relative slowdown in economic growth. "This level of inflation is not something to bother about but the sharp decline in the latest IIP, despite monetary stimulus (Reserve Bank of India has cut repo rate by 1.25% till now this year), is a matter of concern. I don't see this to going up sharply. It will stabilise at this level. Except for one or two indices, which have improved, the overall message is that there will be no sharp increase in growth. It is likely to remain subdued," he said.

The government has indicated that it was expecting GDP growth of over 7% in the current fiscal. In its economic survey, earlier this year, it had projected a GDP growth of 8-8.5% for this financial year. Srivastava said if the government followed the new method of computing the GDP, then the over 7% GDP growth for the current fiscal was achievable. He, however, said that if the domestic demand was adequately stimulated, India's actual growth potential for its national income was 8.5%. "India's industrial output is low because of weak global and domestic demand. We can stimulate aggregate domestic demand as there is still a huge capacity," he said.
According to Srivastava, monetary measures such as repo rate cut by the central bank may not yield much. He called for "direct government intervention" to whip up consumption demand in the local market. Here, he believes the central government would not be able to do much on this front due to its fiscal deficit concerns. The EY economist said the state government, which were in a much better fiscal position, could be roped in to revive domestic consumption.

On Thursday, data put out by ministry of statistics and programme implementation revealed that factory output in September had hit a four-month low at 3.6%, after jumping to a 34-month high in August, even as consumer price inflation (CPI) jumped to 5%. Rise in retail inflation was fuelled largely by higher food prices during the month, led by a 42.2% increase in the prices of pulses. Interestingly, rural CPI for the month was higher at 5.54% compared with 4.28% for urban India. In contrast, food inflation was lower in rural India than in urban areas while services inflation was higher for rural India.

The over 40% dip in the IIP number in September was mainly due to a slump in manufacturing and mining to 2.6% and 3% compared with 6.9% and 3.8% in August. Chandrajit Banerjee, director general of CII, expects the factory output to improve in the second of the current fiscal due to easing of interest rates, festive demand and implementation of public sector projects. The September month also saw capital good sector grow at a slower pace of 10.5% compared with 21.8% a month before. 

Sujan Hajra, chief economist- AnandRathi Financial Services, expects retail inflation to further harden but remained optimistic about it undershooting RBI's target of 5.8% by January 2016, which could prompt the central bank to go for another 50-75 basis points (bps) slash in the bank rate. "The first estimate of the kharif and rabi crops show better production than last year. We note that the adverse impact of the 13.9% rainfall deficiency has been contained. If the CPI meets the RBI inflation target, another 50- to 75-bp rate cut in 2016 is likely," he said in a statement.