Don’t read too much into the encouraging data: economists
India’s retail inflation cooled off to a five-month low of 4.35% in September, thanks to a sharp dip in food price inflation, while industrial output growth accelerated to 11.9% in August, driven largely by a statistical effect of a low base — August 2020 had recorded a 7.1% contraction.
Economists cautioned against reading too much into these encouraging official data prints yet, with adverse headwinds lurking on both fronts.
Food inflation based on the Consumer Food Price Index (CFPI) fell to just 0.68% in September after having declined to a seven-month low of 3.1% in August. While vegetables recorded a negative inflation of 22.5%, price rise in oils and fats remained sticky at 34.2% and in the range of 7% to 8.75% for key protein sources such as pulses, eggs and meat.
However, core inflation which doesn’t include food and fuel price trends, remained elevated at 5.8% for the third month in a row, and economists said the moderation in the inflation rate could be transient, with rising energy, metals and logistics costs being key risk factors.
“A high base is expected to temporarily dampen the consumer price inflation for October and November to below 4%, before an upturn resumes in the remainder of this fiscal,” ICRA chief economist Aditi Nayar said, emphasising that barring food and housing, most sectors recorded a flat or higher inflation reading in September.
Food price trajectory
Food prices’ trajectory will continue to remain important as some vegetable prices have reversed direction and sequentially picked up in October, noted Sreejith Balasubramanian, economist at IDFC Asset Management Company.
“Commodity prices, particularly of crude oil and their partially offsetting impacts on inflation and consumption demand at a time when the economy’s aggregate demand is still below the pre-pandemic level will also be crucial,” he said.
Manufacturing grew 9.7%, electricity by 16% and mining output rose a sharp 23.6% in August, but each of these sectors had recorded negative growth rates in 2020. Overall, however, the Index of Industrial Production (IIP) actually declined in August from July, noted Ms. Nayar.
“The improvement was limited to primary goods and consumer non-durables, with all the other categories reporting a moderation in growth in August relative to July,” she said, adding that the IIP was 3.9% higher than pre-pandemic levels. Consumer durables’ production remained below pre-COVID levels, ‘highlighting the enduring impact of the pandemic on big-ticket demand’, she underlined.
Excess rainfall in September could dent mining, electricity and construction activities, and the non-availability of semiconductors could drive IIP growth to 3-5% in September, the ICRA economist said.
“The growth in IIP in August is mainly because of the base effect,” said Rajani Sinha, chief economist at Knight Frank India.
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