Factories power up; food fuels inflation

Industrial output growth accelerated to a 16-month high of 11.7% in October driven by mining, manufacturing and electricity, and the statistical effect of a low base, while retail inflation in November rose at the fastest pace in three months. While the factory data points to continued momentum in the Indian economy, inflation at elevated levels underlines the central bank’s cautious stance on interest rates, and signals likely measures by the government to curb rising prices.

Data released by the National Statistical Office (NSO) on Tuesday showed that capital goods production, a proxy for fixed investments in the economy, grew in double digits in October. Alongside, double-digit growth in consumer durables, its fastest expansion this fiscal year, highlighted positive consumer sentiment.

In October, output in the manufacturing sector rose 10.4%, mining 13.1%, and power 20.4%. Capital goods production witnessed a 22.6% expansion, while consumer goods output jumped 15.9%. Factory output measured in terms of the Index of Industrial Production (IIP) contracted by 4.1% in October 2022. A favourable base effect and the continued momentum in economic activity helped industrial output stage a strong performance. The surge in factory output preceded the festival of Diwali that fell in November this year.

Data released last month showed the Indian economy shot past expectations to report an impressive 7.6% growth in the September quarter riding an expansion in the manufacturing sector, leading to the Reserve Bank India (RBI) revising its 2023-24 growth forecast to 7% from an earlier estimate of 6.5%.

Separately, statistics ministry data released on Tuesday showed consumer price index (CPI)-based inflation at 5.55% in November, up from 4.87% in October and 5.02% in September; the figure is higher than RBI’s target of 4%, but still remains within its tolerance range of 2-6% for the third consecutive month. In November 2022, retail inflation was reported at 5.88%.

A Mint poll of 23 economists estimated retail inflation to rise to 5.8% in October.

Food inflation, measured by the consumer food price index, which accounts for nearly half of the overall consumer price basket, rose to 8.70% in November from 6.61% in October and 6.62% in September.

In July, India’s retail inflation rose to a 15-month high of 7.4%, led by an increase in food prices spurred by seasonal fluctuations and erratic rains. This prompted the government to strengthen buffers for essential food items, make periodic open market releases, and ease imports of essential food items through trade policy measures. The government also stepped in to prevent hoarding by revising stock limits and channelling supplies through designated retail outlets to curb inflation.

During November, inflation in vegetables and pulses stood at 17.70% and 20.23%, respectively, sharply higher than 2.70% and 18.79%, recorded during October. ‘Food and beverage’ inflation stood at 8.02% in November, up from 6.24% in October.

“While softer than expected, the surge in November CPI inflation has solely been led by food inflation. We continue to monitor the key food items as production remains a worry amidst weak sowing, lower reservoir levels and continued erratic weather conditions,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

The continued moderation in core inflation should provide respite to RBI that should keep interest rates on pause for longer, she added.

Experts also said curbing food inflation is crucial. “Winter season sowing continues to be lower than that of last year, particularly in the case of pulses and even wheat. That remains a key risk for the food and overall inflation trajectory. The RBI baseline forecast places average headline CPI inflation for the third quarter of 2023-24 at 5.6% and at 5.2% for the fourth quarter. For the actual outcome to be in line with this forecast path, curbing food inflation is crucial,” explained Gaurav Kapur, chief economist at IndusInd Bank. At its latest rate-setting meeting in December, RBI kept the repo rate unchanged at 6.5%.

Radhika Rao, executive director and senior economist, at DBS Group Research said the likelihood of further acceleration in the December inflation aligns with the central bank’s cautious stance.

Among states, Delhi and Chhattisgarh reported the slowest retail inflation at 3.10% and 3.56%, respectively, while Odisha (7.65%), Rajasthan (6.99%), Haryana (6.78%) and Punjab (6.54%) recorded the fastest price rice. Economists have also pointed out that any signs of generalization of food inflation would be seen with caution.

A rise in manufacturing activities in India comes at a time when the country faces challenges in the form of slowing global growth and consumption. Indian exports have been impacted, resulting in muted export growth and a high trade deficit in recent months.However, international agencies and the RBI have raised their FY24 growth projection for India on the back of stronger-than-expected consumption.

Last month, Moody’s Investor Services retained India’s economic growth at 6.7% for calendar 2023, citing the country’s remarkable resilience amid a global slowdown, buoyed by solid domestic demand.

Gireesh Chandra Prasad contributed to this story.