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Industrial production data, RBI survey indicate hurdles to growth

Industrial production data, RBI survey indicate hurdles to growth

The Reserve Bank of India’s (RBI) quarterly industrial outlook survey says manufacturing growth may dip slightly in the current quarter. The central bank’s survey also points to a moderation in order inflows.

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At first glance, it seems at variance with the latest Index of Industrial Production (IIP) numbers. Industrial output expanded 3.7% in January, beating economist forecasts. It also came with the pleasant surprise of the December number being revised upwards to 2.5%.

This looks decent considering the high base effect of last year. But on a sequential basis (for seasonally adjusted numbers), growth slowed to 1.1% over a month ago albeit due to a 1.8% spike in December, calculations by Leif Eskesen of HSBC’s research division show.

The three-month moving average of IIP shows a steady decline in growth over a year ago. On that basis, output expansion stands at 3.3% over a year ago compared with 15% at the beginning of this fiscal and 9% in September.

Besides, the leading indicators don’t point to resurgence in output growth, at least for the near future. The three-month moving average of growth in intermediate goods is declining as well, pointing to a continued sluggishness, note Siddhartha Sanyal and Kumar Rachapudi of Barclays Capital.

The moving average stood at 5.6% for January compared with 13.4% at the beginning of this fiscal and 10.8% in September. The base effect will continue for the next few months and will not help either.

The larger question is whether this slowdown in industrial production will help retrain inflation. Economists are quick to point out that it is unlikely.

Consumption demand continues to be strong with consumer goods growing at 11.3% in January over a year ago. Commodity prices, especially that of crude oil, remain a major threat, and make for sticky core inflation.

“While the continuation of the base effect will help, some passes through of commodity prices including coal will likely result in inflation remaining sticky at 7-7.5%," said Rohini Malkani and Anushka Shah in a Citigroup Global Markets Inc. note.

That is also supported by the RBI survey, which says that 30.2% of companies polled were able to pass on a part of rising input cost in the December quarter and 26.7% more expect to do so in the current quarter.

Thus, inflation will continue to remain above the central bank’s comfort zone and the economist consensus for this week’s credit policy review is for a 25 basis points rate hike. One basis point is one-hundredth of a percentage point.

Graphic by Sandeep Bhatnagar/Mint

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