IIP at 1.7%, CPI at 2.57% in January: Growth slowdown disappointing, but wasn't unexpected; MPC may have reason to rush for rate cut
Industrial growth is an important indicator of the real sector as most of the GDP growth we have seen so far is due to services where the government plays an important role
The lower growth in consumer goods is significant as this is probably the starting point of the virtuous cycle in any industrial recovery
The fact that growth has been subdued is important though not worrisome as this is not the month when consumption takes place
Given the lower growth in industry there would be a strong case for further rate cuts by the MPC when it meets next month
mployers in the country. This has been one of the reasons as to why there has been a disconnection between GDP growth numbers and employment. Industrial growth has come in low at 1.7 percent and at a cumulative rate of 4.4 percent does not indicate more than 5 percent growth for the entire year.
Industrial growth is an important indicator of the real sector as most of the GDP growth we have seen so far is due to services where the government plays an important role. Within the industry, it has been observed that both consumer and capital goods have not fared well. Growth in capital goods has fallen, which in a way is not surprising as growth has been volatile in this segment. But it is nonetheless indicative that there has been no major sustained pick up in investment in the economy which is the major takeaway from this growth number.
Non-electrical machinery growth has come down and the transport equipment associated with capital goods has also been in negative territory. It may not be expected to pick up in the next two months and given that the elections are around the corner there could be a further deferment in such plans by corporates.
The lower growth in consumer goods - both durable and non-durable is again significant as this is probably the starting point of the virtuous cycle in any industrial recovery. The fact that growth has been subdued is important though not worrisome as this is not the month when consumption takes place.
One of the reasons for lower growth besides the statistical base effect is that consumption did not pick up in Q3 due to the rural demand story not playing off. RBI data shows that capacity utilisation improved in Q1 and Q2 which means that companies did do some bit of stocking for the demand season. Since demand, especially from rural India, did not pick up companies have tended to slow down on their production processes subsequently. This may be the story for the next two months too.
Therefore, the industrial picture once again points to the government playing a lead role which can be seen in the infra industries which have grown by 7.9 percent on top of 7.5 percent growth witnessed last year. Growth in cement and steel has been high with the government’s focus on roads and urban infrastructure. In a way, the higher fiscal deficit which is being run has not compromised on capex which is a good sign. In the current state of the economy, cutting back this expenditure to meet the fiscal deficit number of 3.4 percent can be negative for growth prospects.
Given the lower growth in the industry with limited upside in the next two months, there would be a strong case for further rate cuts by the MPC when it meets next month. Last time there was a case made for propping up growth in the commentary as inflation was within the control and even the worst-case scenario did not point towards a number of above 4 percent for 2019.
In this context, the CPI inflation number for February can be viewed. There has been an upward movement from 2.0 percent last month to 2.6 percent. The curious part of the CPI inflation profile is that this time it is the miscellaneous category that has pushed up the number. Two parts, health and education, have been the main drivers of inflation and here the explanation is interesting. These two components normally do not change very often and do so only periodically when fees and hospital charges get revised. This is why this number has been pushed upwards and is likely to stay high for a longer period of time. One may recollect that the HRA component on account of the Pay Commission revisions had exerted similar pressure this year but is now cooling down with an increase of 5.1 percent.
How will this number behave from now on? First, for March it can be expected to move up gradually towards 3 percent, which should not be a concern. We have already seen prices of pulses and vegetables increasing in the market and the sharp negative growth numbers will not be sustained. Second, for next year the advantage of a high base year will dwindle and the inflation numbers would be in the higher range though there is no fear presently of breaching the 4 percent mark in the absence of adverse monsoon conditions or turmoil in the oil market.
The MPC is likely to put both these bits of information together and seriously deliberate on whether or not to lower interest rates. SBI has shown a way of improving transmission of rate cuts, but other banks have been more intransigent in their view given that deposits growth has trailed that of credit leading to the liquidity problem. But most certainly a rate cut looks likely in April as it will send strong signals on growth.
(The writer is chief economist, CARE ratings)
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