February 25, 2021

Pressure points ease: industrial production grows, inflation cools

India’s industrial output rose 1 percent in December after releasing a summary in November, on the back of a improvement in manufacturing and capital goods production, according to data released by the National Statistics Office on Friday. Although mining production remained in negative territory, the overall overall index of industrial production was higher than the pre-coveted level seen in February last year.

Separately released retail inflation headline fell to a 16-month low of 4.06 per cent in January, mainly due to the sharp fall in food inflation. This is within the Reserve Bank of India’s medium-term target of 4 ± 2 per cent and lower than the Reserve Bank’s 5.2 per cent target for the January-March quarter.

The Industrial Production Index (IIP) had contracted by 1.9 per cent in November and has now been revised to (-) 2.1 per cent. Industrial production increased by 0.4 percent in December 2019.

Manufacturing output, which weighs 77.6 per cent in IIP, rose 1.6 per cent in December, while power generation rose 5.1 per cent. However, mining production contracted by 4.8 percent in December. Capital goods production, an indicator of investment, rose 0.6 percent in December. Consumer durables and non-consumer durables increased by 4.9 per cent and 2.0 per cent, respectively. Overall, in April-December, India’s industrial output contracted by 13.5 per cent over 0.3 per cent last year. The easing of food inflation helped the CBI reduce inflation, which fell to a 20-month low of 1.89 per cent in January from 3.41 per cent in December, while vegetable inflation fell to 15.8 per cent in January.

“The strong base effect on vegetable prices will keep food inflation low for the next six to nine months. However, the increase in vegetable prices in the summer months cannot be ruled out,” said Sunil Kumar Sinha, chief economist at India Ratings.

Fuel and light inflation rose to a 10-month high of 3.87 per cent in January from 2.92 per cent in the previous month as a result of rising crude prices and retail prices of petrol and diesel. Core inflation was 5.65 per cent in January, despite rising non-food, non-fuel inflation component, clothing, footwear and health inflation.

The Reserve Bank said in its February Monetary Policy Review that the food inflation path will shape the near term outlook. “… Outlook for major inflation may be affected by further easing of supply chains; However, a broad-based increase in cost-driven pressures on services and manufacturing prices due to rising prices of industrial raw materials could put upward pressure, ”it said.