At -3.2%, IIP suffers worst fall in over four years; retail inflation quickens to 5.61% December; puts govt, policymakers in tight spot
A massive slump in the Index of Industrial Production (IIP) number for November at -3.2% as against 9.8% in October and an upward movement in the retail inflation at 5.61% in December compared with 5.41% a month before has put the government and policymakers in a tight spot.
The IIP fall was sharpest since October 2011.
D K Srivastava, chief economic advisor, EY India, said the government would be in a "dilemma" as to how to respond to these numbers without easing the fiscal deficit targets.
"There are two messages in these numbers; while aggregate demand has to be boosted, the possibility of the RBI (Reserve Bank of India) providing a helping hand is not there because the CPI number has upturned, and so there is an immediate dilemma as to how to respond without relaxing the fiscal deficit targets," he told dna.
The IIP figures on Tuesday showed there was weakness across all segments with the biggest dip coming in manufacturing and electricity.
Manufacturing in November shrank 4.4% from a growth of 4.7% in the previous month, which indicated more than nine percentage points drop even as electricity barely grew at 0.7% compared with the 10% growth in the same month last year. Mining was also weak at 2.3% in November against 4% a year back. Capital goods contracted 24.4% in November compared with 7% expansion last year. Consumer goods production climbed marginal by 1.3% during the same period.
"These are indicative of considerable contraction in demand because of which manufacturers are not producing up to their capacity," said Srivastava.
On the other hand, Consumer Price Index (CPI) in December further hardened with food prices remaining high due to the near-drought situation in the country, which has resulted in scarcity of food and food products.
And with the RBI keeping a hawk eye on retail inflation, any hopes of a repo rate cut before the Budget have been completely shoved out of the way.
Amit Kumar Sarkar, partner and leader – indirect tax, Grant Thornton, expects the rates to be unchanged till the Budget.
"From what I see the RBI has already done what they wanted to do this time (January) last year. It had given half a percentage point discount on interest rates and has been waiting for the last nine months to a year for the fiscal situation to improve. That has not happened. So, why should it stick its neck out and go for a further rate cut? Or why should it give the government less than a year and lose patience and increase rates?" he said.
Sarkar said the central bank will wait and watch the Budget before taking any decision on rate cut.
"Because it is Budget season now, the RBI would rather wait and see how the Budget comes out. If Budget shows a huge amount of government spending and a huge amount of fiscal deficit then it would like to suck money out of the system and hence it would increase interest to douse inflation," said the Grant Thornton tax expert.
A Crisil economist said the CPI average for the fiscal 2016 was within RBI's target of 6% by January 2016.
"We, therefore, believe the RBI will keep policy rates unchanged for the rest of this fiscal unless inflation surprises on the downside. In fiscal 2017, we believe, CPI will moderate further to 5.2%. This is under the assumption of further fall in food inflation on the back of normal monsoon, whereas pressures on non-food inflation (excluding fuel) under check," said the statement issued by the credit rating agency.
Dhananjay Sinha, head- institutional research, economist & strategist, Emkay Global Financial Services Limited, attributed the dip in industrial production to festive season.
"Festive month, November, impacted the overall production growth," he commented in a note.
"Subdued PMI (purchase managers' index) and other indicators point towards a softer growth of industrial production in H2FY16 (second half of the current fiscal). We believe, that RBI will keep policy rates unchanged until the Budget in February, 2016 and likely push for the growth will be from government spending," said Sinha.
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