Factory output contracts again as inflation spikes

New Delhi: With muted growth in the manufacturing sector, the country’s factory output contracted in December and the retail inflation accelerated for the sixth consecutive month in January, casting doubts over the government’s claim of a recovery is in sight for the economy.

The government data on Index of Industrial Production (IIP), on Wednesday, showed that industrial output contracted 0.3 per cent in December against a growth of 1.8 per cent in November. Besides, retail inflation jumped to over five-and-a-half-year high of 7.59 per cent in January on persistently high prices of vegetables, pulses and protein-rich meat and fish.”

The government data came two days after when finance minister Nirmala Sitharaman claimed the economy is on the mend, relying on seven indicators, including the IIP, to show that green shoots have started to emerge in the economy that is projected to grow at a mere 5 per cent this fiscal, hitting an 11-year low.

Manufacturing output, which accounts for more than three-fourths of the IIP, fell 1.2 per cent against a growth of 2.7 per cent in November. Production of capital goods saw a contraction of 18.2 in December against a contraction of 8.6 per cent a month ago. Also consumer durables fell 6.7 per cent in December against a fall of 1.5 per cent in November and electricity production by 0.1 per cent against a fall of 5 per cent a month ago.

However, mining production grew 5.4 per cent against a growth of 1.7 per cent a month ago. Similarly, the growth of primary products was 2.2 per cent against a fall of 0.3 per cent in the previous month.

The Consumer Price Index (CPI)-based inflation, which rose to 7.59 per cent in January, was at 7.35 per cent a  month ago in December 2019 and a year ago at 1.97 per cent in January 2019. The CPI had hit 8.33 per cent in May 2014.

Economists said the rising inflation could prompt the Reserve Bank of India to leave interest rates unchanged in coming months. “Growth-inflation mix has seriously deteriorated ... there will be a longer pause in the rate-cutting cycle now,” said Rupa Rege Nitsure, chief economist, L&T Financial Holdings.

The overall food inflation during January this year stood at 13.63 per cent, slightly lower than 14.19 per cent in the previous month. Among protein-rich items, prices of meat and fish went up by 10.50 per cent during the month, while egg prices were higher by 10.41 per cent against the year-ago period. The food and beverages category showed an inflation print of 11.79 per cent.

“The internals of the food inflation are worrying, given a broad-based uptick across categories that tend to be sticky, such as proteins, and a narrower-than-expected reduction in inflation for vegetables. Moreover, the fairly broad-based rise in the core inflation to 4.1 per cent in January 2020, driven by various services, is a cause for concern,” said Aditi Nayar, principal economist, Icra.