New Delhi: Two weeks before the presentation of budget 2013, the Congress-led United Progressive Alliance faced fresh macroeconomic challenges after data released on Tuesday showed that factory output contracted in December and consumer price inflation accelerated in January to a 13-month high.
Together with the projection that economic growth would drop to a 10-year low of 5% in the current fiscal year, the data has the potential to roil the underlying arithmetic of the budget; at the same time, it also seems to suggest that the economy is yet to bottom out and is still being subjected to volatility.
The Index of Industrial Production (IIP) surprisingly contracted 0.6% in December while retail inflation based on the Consumer Price Index accelerated to 10.79% in January from 10.56% in the previous month, according to data released by the Central Statistics Office (CSO).
According to the revised data, factory output in November contracted 0.8%, worse than the provisional estimate of a 0.1% decline.
To be sure, India’s factory output numbers have always tended to be volatile, because of the way the index is constructed, and prone to frequent revisions.
The industrial production data should be seen in the context of CSO’s projection that the Indian economy could grow only 5% in 2012-13. The finance ministry later rejected the forecast, holding that it was based on dated information and said growth would be 5.5% or more during the year ending March.
Some experts were also expecting the December factory output number to reflect the widely held belief that the economy had bottomed out, and that most government data would slowly move north. CSO has projected factory output growth will slow to 2% in 2012-13 from 2.7% a year ago, mostly due to a drastic slowdown in manufacturing and mining activities.
C. Rangarajan, chairman of the Prime Minister’s economic advisory council, said there was a need to stimulate investment to get back to the high growth path.
“Our investment rate has fallen, but it is still growing at a rate of 30% to 32% (as a proportion of gross domestic product, or GDP). We need to look at the fact that we have not been getting the full benefits of the investments that we have put in. If we activate these investments, we can get a higher growth,” Rangarajan said.
“I believe that in the next fiscal, we should be able to grow at 6-7%, and 8% thereafter,” he added
Abheek Barua, chief economist at HDFC Bank Ltd, said that if the current trend in growth dynamics continues, the 5% GDP growth projection by CSO may turn out to be correct. “There has been no improvement in the investment scenario. Consumption is not picking up. I think we were a little more optimistic,” he said.
In December, manufacturing as well as mining contracted 0.7% and 4%, respectively, while electricity generation rose 5.2%. While output from mines has been hit by regulatory hurdles and court orders halting production in some areas to curb illegal mining, manufacturing has been hurt by high interest rates and slowing consumer demand.
After the pre-Diwali spurt in production in October, production of consumer goods, both durables (-8.2%) and non-durables (-1.4%), contracted, adding to the declines in December.
The weakening in consumer demand was validated by car sales data released on Monday, which showed that sales had contracted for the third straight month in January by 12.45% as buyers pushed back purchases due to high consumer loan rates and rising fuel prices.
“The soft print in consumer goods production is a cause for some worry, as this sector has lent support to IIP growth in the past,” Yes Bank Ltd chief economist Shubhada Rao said.
Capital goods, a proxy for investment demand in the economy, remain volatile, with production contracting 0.9% in December.
Similarly worrying is the increase in inflation, which was stoked in January by higher prices of vegetables and protein-rich items, making policy choices more difficult for the central bank.
Samiran Chakraborty, head of India research at Standard Chartered Bank, said the increasingly divergent trend between wholesale and retail inflation is a disturbing factor.
Wholesale price inflation has been decelerating for the last four months and was at 7.18% in December, while retail inflation has stayed in double digits for last three months.
“RBI (Reserve Bank of India) will be watching the trend in wholesale price inflation and the trade deficit numbers before taking a call on cutting policy rates to support growth,” Chakraborty said.
Barua of HDFC Bank said the hike in railway passenger fares for the first time in a decade and the fuel price hikes could have second-round effects starting in the middle of the year, which could further stoke retail inflation.
“I think for the time being, RBI will use the softening core inflation to cut policy rates in March and April by 25 basis points each, after which it will stop,” he added. Core inflation, which excludes volatile food and fuel prices, eased to 4.2% in December from 4.5% a month ago.
A basis point is one-hundredth of a percentage point.
PTI contributed to this story.