Weak industrial production numbers in September and inflation inching up in recent months do not offer any comfort to policymakers. The Monetary Policy Committee (MPC), set to review the policy in December, has a tough job ahead. The factory output fell to 3.8 percent in September compared with 4.5 percent in August. The October CPI rose to seven month high of 3.58 percent from 3.28 percent in September while Wholesale Price Index (WPI) stood at six month-high of 3.59 percent in October compared with 2.6 percent in September.
The Index of Industrial Production (IIP) is a volatile number. Economists typically avoid making predictions looking at a single month’s IIP data. That’s the reason when IIP jumped to 4.5 percent in August, economists were cautious and said more data is needed to form an opinion. The September figures follows the pattern began early this fiscal year. A closer look at the September IIP numbers would tell us that the major villain continues to be the slowing manufacturing sector. Manufacturing sector, which accounts for 78 percent of the index, slowed to 3.4 percent from 5.8 percent a year earlier.
During April-September, manufacturing grew at 1.9 percent, down from 6.1 percent in the same period last fiscal while consumer durable goods output contracted by 4.8 percent in September as against a growth of 10.3 percent in the previous year. Cumulatively, the IIP growth in April-September stood at 2.5 percent compared with 5.8 percent in the comparable period last year. This means the slowdown trend is sustaining with key sectors dragging growth down. This isn’t a good sign for the economy.
Inflation, albeit showing signs of going up, does not offer reasons for big worry as most economists expect the food prices—the major reason for higher inflation--to ease going ahead. In Consumer Price Index (CPI), food inflation has also gone up from 1.3 percent in September to 1.9 percent in October mainly on account of rising prices. According to CARE rating agency, the CPI inflation numbers will range between 4 percent-4.5 per cent by the end of the year. The lowering of GST for some of the products could temper this increase going ahead, the agency said.
Typically, rising inflation trends and falling factory output pictures a difficult scenario for the economy. But the problem can become a lot severe if crude oil prices begin to move up sharply. This trend has already begun. Crude has already run past $60 per barrel and experts (read a story here) forecast crude prices to go higher next year. “Crude oil price in particular is something to watch out for,” said Care in the note.
The Modi government received the benefit of lower crude oil prices in the initial years but that scenario may change soon. Higher crude prices may have its impact on global food and commodity prices as well, which may have cascading effect on the Indian economy as well. If inflation begins to inch up, that will considerably narrow the room for Reserve Bank of India (RBI) rate cuts. This is where the real test for the Modi government begins. High inflation, lower growth and rising interest rates would be a terrible mix to deal with.
(Data support by Kishor Kadam)
Updated Date: Nov 14, 2017 16:28 PM