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Why rising inflation and lower industrial output is not such a bad news

12 January, 2016

India’s consumer inflation accelerated in December to a 15-month high as food prices rose for a sixth month in a row, government data showed on Monday.

A separate set of data showed industrial production fell to a four-year low in November as capital goods and manufacturing contracted.

The two sets of data come ahead of the Reserve Bank of India’s monetary policy review meeting early next month. However, the data may not affect the RBI’s decision on interest rate. This is because inflation is still within the RBI’s 6 per cent target for January. Also, a rate cut depends more on the government meeting its fiscal deficit target and the RBI may wait until after the budget session to change interest rates.

The data showed that consumer price inflation quickened to 5.61 per cent in December, higher than the 5.41 per cent print in November and exceeding the 5.4 per cent forecast in a survey of 10 economists conducted by VCCircle last week. However, the number is below the RBI’s 6 per cent target for January.

While it was pulses again that led the rise in food prices with a 45 per cent increase, the major reason of worry for the government was the contrast in rural and urban inflation figures.

A closer analysis of the inflation data shows that while the general index increased 4.73 per cent for the urban population, the rural index went up to a 16-month high of 6.32 per cent.

While inflation seems to be in the safe territory for now, the ensuing hike in wages of central government employees and a weakening of the base effect may make it difficult for the central bank to reach its 5 per cent target for the next fiscal year.

Meanwhile, the Index of Industrial Production (IIP) contracted 3.2 per cent in November from a year earlier as capital goods output plunged to a 41-month low. The basic goods and intermediate goods industries also contracted in November.

While mining and electricity output grew in November, manufacturing activity contracted 4.4 per cent. The IIP numbers present a contrast to the five-year high of 9.9 per cent the index hit in October. Much of this decline in industrial output can be attributed to Diwali falling in November. The festive period brought a shutdown in activity, especially in the western region. The drop in output during Diwali is not unusual. In October 2014, when Diwali was celebrated, production contracted 2.7 per cent on a year-on-year basis. The same was the case during the festive season in November 2013 when output fell 1.3 per cent from the year before.

Aditi Nayar, senior economist at ratings firm ICRA, said that, notwithstanding the waning of the unfavourable base and some improvement in electricity generation, industrial output is likely to post low growth in December 2015 compared with the 3.6 per cent expansion in December 2014, on account of persisting dampeners such as sluggish exports and rural demand and one-off factors such as the floods in Tamil Nadu.


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Why rising inflation and lower industrial output is not such a bad news

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