Factory output shrinks, inflation soars2 min read . Updated: 13 Apr 2021, 12:31 AM IST
- Except electricity, which almost remained flat at 0.1% growth, both mining (-5.5%) and manufacturing (-3.7%) contracted in February
India’s factory output contracted the most in six months in February for the second consecutive month, even before the second wave of the coronavirus pandemic hit the economy, signalling that the government and the Reserve Bank of India (RBI) may have to continue supporting the recovery process even as retail inflation jumped to a four-month high in March.
The index of industrial production (IIP) shrank 3.6% in February, while retail inflation quickened to 5.52% in March, showed data released by the National Statistical Office on Monday. Both mining (-5.5%) and manufacturing (-3.7%) contracted in February, while electricity remained almost flat at 0.1%.
The data trend of the past few months reinforces the view that the upward movement witnessed in September and October was more because of a combination of festive and pent-up demand and the economy is still far from witnessing a sustained recovery, said Devendra Kumar Pant, chief economist at India Ratings and Research. “Other than consumer durables, all other five segments witnessed contraction in February, against three in January. This also means that the government and the RBI will have to continue to support demand," he said.
India has registered more than 100,000 daily covid cases consecutively for the last six days with around half of the caseload coming from Maharashtra. Many states, including Maharashtra, Delhi, Chhatishgarh, Punjab, Haryana, and Karnataka have imposed night curfews, partial lockdowns and reduction in working hours to limit the spread of the virus. Economists believe contact intensive services may be the first casualty of the second wave of the pandemic.
In March, both manufacturing and services purchasing managers’ index (PMI) declined, reflecting the early impact of the surge in infections.
The International Monetary Fund (IMF) on 6 April upgraded its FY22 growth projection for India from 11.5% estimated in January to 12.5% but cautioned that the forecast hasn’t factored in the severe downside risks arising from the country’s ongoing second wave of covid-19.
Food inflation rose by 4.94% driven by protein items such as pulses, meat, fish and egg. Fuel prices increased by 4.5% in March while core inflation touched 6% during the month.
After the spike in March, there is likely to be a temporary drop in the April CPI print to around 4%, led by the base-effect related to the lockdown and the decline in prices of vegetables and modest dip in retail fuel prices, before an upturn resumes over the remainder of this quarter, said Aditi Nayar, chief economist at Icra Ratings.
“With the Monetary Policy Committee (MPC) forecasting CPI inflation to average around 5% in FY2022, 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," she said.
This is the first set of inflation numbers after the government announced that it is keeping the inflation-targeting framework for the central bank unchanged for the five-year period beginning 1 April, ending speculation that a more relaxed inflation goal may be adopted to boost growth.
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