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Inflation, IIP Still Haunts Economy

Monday, May 16, 2016
By Dominic Rebello

Upside risks to inflation in FY17 can emanate from; a rise in global commodity prices, especially oil; an increase in services inflation, and an unfavourable spatial or temporal distribution of rainfall. The growth in manufacturing may take more time to pick up.

Inflation jumped up to 5.4% in April from 4.8% last month on the back of higher food inflation. Core inflation also inched up to 5.2% led by rising housing and clothing & footwear inflation. “We believe this increase to be transitory as a normal monsoon and proactive steps by the government in food supply management will support lower food inflation this fiscal. For 2016-17, we expect CPI to stay close to 5% on average, assuming a normal monsoon. An area of concern remains 1) high protein inflation which has recorded double digit growth for 11 consecutive months and 2) service inflation, especially in rural areas, which is keeping core inflation high and sticky” says Crisil Research.

On IIP, even as it remained positive, its growth fell sharply to 0.1% on-year in March from 2.0% in February, despite a low base of last year. While manufacturing growth again turned negative (-1.2%), mining activity unexpectedly fell by 0.1% in March, the first decline since June 2015.

Capital goods continued to be major drag on industrial activity reflecting weakness in investment activity while consumer durables output saw mild upturn on-year reflecting some improvement in demand. In fiscal 2017, assuming a normal monsoon, an uptick in the rural economy will drive consumption. The lagged impact of interest rate reductions, salary revisions and easier monetary conditions will also support demand and boost industrial capacity utilisation.

“We expect GDP to rise to 7.9% in fiscal 2017 from 7.6% in fiscal 2016 and industry GDP to grow at 7.6% driven by manufacturing and construction activity, says Crisil.

In an analysis of the two, Crisil Research believes “The 60 bps rise in CPI was led by a rise in food inflation, especially in vegetables, pulses and products, sugar, and meat and fish. Protein inflation rose further to 17.6% in April, recording the 11th consecutive month (since June 2015) of double digit inflation. “

“Core inflation also inched up to 5.2% in April from 5.1% previously. Upside pressures on core inflation came from a rise in housing and clothing and footwear inflation. Other categories such as health, education, and recreation continued to remain sticky in the month. The stickiness in core inflation is led by services, indicating capacity constraints in the sector.”

“Rural inflation rose to 6.1% from 5.7% in March and Urban inflation rose to 4.7% compared to 3.9% previously. Food inflation increased at a steeper rate in urban areas as compared to rural in April. On the other hand, core inflation rose to 6.5% in rural areas while remaining stagnant at 4.9% in urban areas.”

Going ahead, Crisil is of the view that “given that monsoons are likely to be normal this year, we expect inflation to remain close to 5%. Also, the recent RBI inflation expectation survey (Mar 2016) signals that households' inflation expectations have moderated. The number of respondents expecting inflation to rise in the coming months has fallen to 31% from 36% in Dec 2015”.

Upside risks to inflation in FY17 can emanate from; a rise in global commodity prices, especially oil; an increase in services inflation, and an unfavourable spatial or temporal distribution of rainfall.

Analysing the Data Readings, Crisil says “Even as it remained positive, IIP growth fell sharply to 0.1% on-year in March from 2.0% in February, despite a low base of last year. While manufacturing growth again turned negative (-1.2%), mining activity unexpectedly fell by 0.1% in March, the first decline since June 2015. Electricity growth rose to 11.3% in March from 9.6% in February, acting as an anchor for the overall IIP growth. With this, IIP growth for the fiscal 2016 as a whole stood at 2.4%, down from 2.8% last fiscal”.

On Manufacturing growth which had turned positive last month – after three consecutive monthly declines – and again turned negative in March (-1.2%), Crisil is of the view that “Within manufacturing, weakness was felt across the board. While consumer oriented sectors grew positively (2.0%), it was largely on account of a low base of last year. Amongst consumer oriented sectors, food & beverages grew by -15%, textiles by -1.1%, motor vehicles etc. by 12.3% and rubber & plastic products by 1.0% in March. Industrial and investment oriented sector saw their growth decline intensifying to -3.4% in March (from -0.5% in February).”

“Within it, electrical machinery and base metals saw their growth declining whereas there was some improvement in segments such as chemical and chemical products. Overall 10 out of 22 industry groups in manufacturing recorded negative growth in the month.”

Analysing use based classification; Crisil says “capital goods category continued to remain the biggest drag, registering a decline of 15.4% in March, after declining by 9.5% in the previous month. Basic goods did grow positively (4%), but given the low base of last year, this was rather subdued.
Consumer goods grew by a mere 0.4%, that too on a negative base, with consumer non-durables growth (-4.4%) largely contributing to the poor show. For fiscal 2016 as a whole, capital goods are down by 2.9% compared to a positive growth of 6.3% last fiscal. Consumer durables on the other hand are up 11.2% in fiscal 2016, compared to -12.6% growth in fiscal 2015.”

“It is evident from the data now that the weak consumer and investment demand has started impacting the growth of manufacturing more than exports. The growth in manufacturing may take more time to pick up. Its therefore important that the Government holistically addresses the issues related to manufacturing by a high level institutional mechanism involving all departments and States…The growth in manufacturing for the last year is disappointing and emphasizes the need for more deep rooted reforms for the sector to make its growth sustainable in the long run”  

  - Harshavardhan Neotia, President, FICCI.


CARE Ratings View
Industrial Output March 2016: Industrial production at 0.1% in March and 2.4% for the full year indicates that the expected turnaround in industrial growth has not materialized. The performance of capital goods, which is an indicator of investment is still negative. Consumer goods and basic goods have performed relatively better which can be attributed to consumer spending on durables like electronics and vehicles to an extent, and government spending on infrastructure. However, this has not been sufficient to accelerate overall growth and it needs to be seen whether a good monsoon will reinforce spending by households and the infra push by the government becomes stronger.

We do expect growth of 4-5% for FY17 aided also by the low base effect as well as revival in these two segments – basic goods from April itself and consumer goods from September onwards.

CPI Inflation - April 2016: CPI inflation has come in at 5.4% which is higher than expectations. The food basket has contributed to this increase and while the rate is within the 6% upper band, the RBI will be observing this closely as the present drought conditions in Maharashtra and other parts with zero reservoir levels can lead to pressure on some products even if the monsoon is normal given the rather difficult conditions prevailing here. However, given the monsoon forecast the CPI inflation rate will not cross 6% but will continue to range between 5-6% for some time.

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