Rising food prices pushed India's retail inflation in December to 5.21%, intensifying pressure on RBI to raise policy rates in the next few months
New Delhi: India’s factory output growth leapt to a 17-month high in November, partly the effect of a lower year-ago base in the aftermath of demonetisation, and retail inflation also quickened to a 17-month high, confirming that an economic recovery is underway amid rising price risks.
Data released by the Central Statistics Office (CSO) on Friday showed the Index of Industrial Production (IIP) rose to 8.4% in November from 2% in October; inflation measured by the Consumer Price Index (CPI) accelerated to 5.21% in December from 4.88% a month ago.
This is the final set of data that finance minister Arun Jaitley will have before him as he sits down to finalize the budget for 2018-19, to be presented on 1 February.
CSO on 5 January projected economic growth to decelerate to 6.5% in 2017-18 from 7.1% last year. Growth will accelerate to 7% in the second half of the year (October-March) from 6% in the first half (April-September), CSO said.
The economy has been hurt by the lingering impact of the invalidation of high-value banknotes in November 2016 and disruptions caused by the goods and services tax, introduced on 1 July.
Commerce and industry minister Suresh Prabhu tweeted: “The upswing in economic activity continues! Index of Industrial Production grows by 8.4% in Nov’17. Economic reforms unleashed by the Govt under #Leadership of Hon.PM @narendramodi showing results!"
Higher inflation in December was due to hardening vegetable prices (29%) and rising cost of housing (8.25%) after the government’s decision to increase house rent allowances for central government employees in line with the 7th Pay Commission recommendations.
The divergent IIP and CPI trend has dashed any hopes of monetary easing in the near future, said D.K. Pant, chief economist at India Ratings and Research Pvt. Ltd. “If inflation continues to follow past seven months’ trend, the monetary authority may start thinking about tightening of monetary policy," he added.
The Reserve Bank of India (RBI) maintained a neutral stance in its December monetary policy review, citing the risk of rising inflation.
Inflation has quickened because of a low base effect, said Richa Gupta, senior economist at Deloitte India. “The current print is unlikely to lead to any major change in the RBI’s stance in the near term as inflation is likely to head downwards in the second half of the year once the unfavourable base effects wane. That said, energy and commodity prices could exert some pressure if global growth momentum picks up from current levels," she added.
In terms of industries, 15 out of the 23 industry groups in the manufacturing sector showed growth. The group ‘Bodies of trucks, lorries and trailers’ recorded the highest growth of 202% in November. Sales of commercial vehicles were up 52.62% in December, according to data from the Society of Indian Automobile Manufacturers.
Output of the group ‘digestive enzymes and antacids’ grew 110% and made the highest contribution—2.5 percentage points—to overall IIP growth.
Production of gold jewellery (-68.7%) and anti-malarial drugs (-66.4%) registered the highest decline in production in November.
While the manufacturing sector was the key driver of growth at 10.2%, mining output and electricity generation slowed to grow at 1.1% and 3.9% respectively.
Output of capital goods, a proxy for investment demand in the economy, grew for the fourth successive month at 9.4%. Production of consumer non-durables jumped 23.1%. Output of consumer durable products grew by just 2.5%, reflecting weakness in urban demand.
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