Reminder to Jaitley ahead of budget: Dec factory output contracts; Jan inflation hits 17-month high - Firstpost

Reminder to Jaitley ahead of budget: Dec factory output contracts; Jan inflation hits 17-month high

  Updated: Feb 13, 2016 09:50 IST

#consumer price inflation   #food costs   #IIP   #industrial output   #manufacturing  

In a grim reminder of the ills plaguing the Indian economy, industrial production declined for the second month in a row registering a negative growth of 1.3 percent in December and inflation in January hit a 17-month high of 5.69 percent.

The decline in factory output has been mainly on account of a drop in manufacturing and capital goods sector, while the upward movement in inflation has been attributed to a rise in food prices.



Both the numbers point to the imbalances lurking in the Indian economy, which finance minister Arun Jaitley needs to address in his Budget 2016 to be presented on 29 February.

Retail prices in January rose 5.69 percent on year in January, their fastest pace since August 2014. The rise compared with a 5.4 percent increase predicted by analysts in a Reuters poll and a 5.61 percent annual gain in December.

The 1.3 percent decline in output at factories, utilities and mines was steeper than 0.1 percent fall forecast by economists surveyed by Reuters. The contraction, however, was smaller than a revised 3.4 percent fall in November.

A look at inflation data shows that there is no let-up in food inflation. Retail food prices were up 6.85 percent on the year in January, compared with 6.40 percent in December.

"The (inflation) number has surprised us on the upside mainly due to higher food and housing rentals. Within food, prices of pulses continue to hold at elevated levels while prices of other protein items also went up. The elevated inflation in key food items despite the decline in global food prices over the last two years suggests structural mismatches and poor policy choices in India," A Prasanna, economist, ICICI Primary Dealership, told Reuters.

What is more worrying is with the government set to hike salaries and pensions of its employees later this year, demand-driven price pressures are likely to get a boost.

That could make it tougher for the central bank to tamp down retail inflation to 5 percent by March 2017, diminishing hopes for further rate cuts.

"We think that the window for further easing ... has shut," Mark Williams, chief Asia economist at Capital Economics, told Reuters after the data release.

Coming back to the sluggish industrial output numbers, the decline in December has been primarily on account of a massive drop in output of capital goods which showed a contraction of 19.7 percent compared to growth of 6.1 percent in the same month a year ago.

The manufacturing sector, which accounts for over 75 percent of the index, declined by 2.4 percent against a growth of 4.1 percent in December 2014.

However, the mining sector showed an improvement, registering a growth of 2.9 percent in the month as against a contraction of 1.7 percent in same month a year ago.

Power generation showed deceleration, recording a growth of 3.2 percent as against 4.8 percent growth in same month a year ago.

As per the used based classification, basic goods reported a marginal increase of 0.5 percent as against 5.9 percent in December 2014.

The consumer goods output increased to 2.8 percent as against 0.6 percent in December last fiscal.

Consumer durables, however, showed robust growth of 16.5 percent in December as against a contraction of 9.2 percent during the same month last fiscal.

However, the consumer non-durable segment showed a contraction of 3.2 percent in December as against a growth of 5.6 percent in the corresponding month.

In terms of industries, ten out of the twenty two industry groups in the manufacturing sector showed negative growth during December 2015 as compared to corresponding month of the previous year.

Interestingly, Friday's data comes days after the economy posted growth of 7.3 percent in the quarter through December, faster than the 6.8 percent growth posted by China in the same quarter.

The data had shown consumption outpacing investments, signaling potential inflationary risks.

Industrial output data further underscored that risk as capital goods production, a proxy for investments, fell nearly 20 percent year-on-year in December. Consumer goods, a gauge for consumer spending, grew 2.8 percent.

It piles pressure on Finance Minister Arun Jaitley to unveil measures when he presents the budget to revive private investments, which have been dormant for the past four years.

His strategy to stimulate corporate spending through debt-fuelled higher public investment has yet to bear fruits.

Jaitley is under pressure to relax fiscal deficit targets in the budget and ramp up public spending to give the economy more momentum.

But RBI Governor Raghuram Rajan has cautioned against straying from fiscal consolidation, saying the move would jeopardize the country's economic stability at a time of global market turmoil.

With inputs from Agencies

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