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IIP falls 3.6% in Feb, CPI inflation hits 4-month high

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IIP and Retail InflationIIP and Retail InflationFavourable base effect from March will push up the IIP growth, but any worthwhile industrial recovery is still away, analysts have said.

Contraction in industrial output widened to 3.6% year-on-year in February from 1.6% in the previous month, while retail inflation in March scaled a four-month peak of 5.52%, according to official data released on Monday.

This will add to the woes of policymakers and complicate the task of the central bank at a time when risks to economic growth from a second wave of Covid-19 cases mount, amid fears of further lockdowns in key states like Maharashtra.

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Intermediate goods, primary goods and infrastructure goods — the segments that have performed better than the rest in recent months — have contracted by 5.6%, 5.1% and 4.7%, respectively, in February. Importantly, before the latest drop, infrastructure/ construction goods had recorded expansion in each month since August 2020, driven primarily by elevated government spending.

In contrast, a contraction in capital goods and consumer non-durables narrowed to -4.2% and -3.8%, respectively, in February from -9% and -5.4% in the previous month. Consumer durables production made a smart recovery, having risen by 6.3% in February from 0.2% in January. Favourable base effect from March will push up the IIP growth, but any worthwhile industrial recovery is still away, analysts have said.

Some of the other high-frequency indicators, too, have remained weak. Manufacturing PMI hit a seven-month low in March. Loan growth remained under 6.5% in the week through March 12. The business resumption index of Nomura dropped on April 4. Although, some other gauges (such as GST mop-up and exports in March) have shown an uptick, the second wave of the pandemic and resultant restrictions threaten the recovery process.

What also adds to policymakers’ worries is the stubbornness of retail inflation. Food inflation widened to 4.94% in March from 3.87% in the previous month. Inflation in oil and fats surged by 24.92%, meat and fish by 15.09%, non-alcoholic beverages by 14.41% and pulses 13.25%. Inflation in transport and communication jumped by 12.55%, while that in health remained elevated at 6.17%.

However, some analysts expect a temporary fall in retail inflation in April to 4-4.5%, aided by a base effect and likely drop in prices of vegetables. But the price pressure could return as early as May, they said.

“With the Monetary Policy Committee forecasting the CPI inflation to average around 5.0% in FY22, rate cuts appear to be ruled out, unless economic activity undergoes another deep Covid-induced disruption. However, even in the latter situation, supply disruptions may cause inflation to spike, limiting the extent of the monetary policy support that may plausibly be forthcoming,” Icra principal economist Aditi Nayar said. She expected an extended pause in the repo rate through 2021, and in the reverse repo rate during the first half of this fiscal.

India Ratings chief economist DK Pant said the data trend “reinforces the view that the uptick witnessed in the month of September and October 2020 was more due to a combination of festive and pent-up demand and we are still far from witnessing a sustained recovery”.

“Growth pattern of primary and intermediate goods, two leading indicators of industrial production, are pointing towards a lacklustre industrial performance in short- to medium-run. This also means government and RBI will have to continue to support demand,” Pant said.

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