Double whammy: Retail inflation rises, factory output contracts

PTI | New Delhi | Updated: 12-04-2021 20:06 IST | Created: 12-04-2021 20:06 IST
Double whammy: Retail inflation rises, factory output contracts

In a double whammy for the economy, retail inflation jumped to a four-month high of 5.52 per cent in March while industrial output contracted for the second month in a row, falling 3.6 per cent in February -- reinforcing concerns over the pace of GDP recovery amid a fresh wave of coronavirus infections.

Contraction in factory output, measured as the Index of Industrial Production or IIP, in February came on the back of a 0.9 per cent decline in January, according to government data released on Monday.

With both mining and manufacturing contracting in February, the lack of momentum in industrial activity along with fresh COVID-19 lockdowns in certain states has cast its shadow on the likelihood of meaningful positive GDP growth in the fourth quarter of the 2020-21 fiscal.

Policymakers had expected positive GDP growth in January-March to restrict the annual FY21 contraction to 7.5-8 per cent.

Higher food inflation and spurt in fuel prices led the consumer price index (CPI) based retail inflation rising to 5.52 per cent in March, from 5.03 per cent in the previous month. Core inflation jumped to a 29-month high of 5.96 per cent in March 2021 (3.95 per cent in March 2020 and 5.88 per cent in February 2021).

Though the contraction in IIP growth in February could be attributed to the base effect (February 2020 growth was at a 16-month high), there was a worrisome sequential drop in the manufacturing output. This comes as India reported yet another peak in daily COVID-19 cases with 1,68,912 new cases, the highest single-day rise since the pandemic began, with its total tally pushing past 1.35 crore. Some states such as Maharashtra and Delhi have already imposed partial lockdowns to curb its spread.

Commenting on the macroeconomic data, India Ratings and Research said the uptick witnessed in September and October last year was more due to a combination of festive and pent-up demand and India is still far from witnessing a sustained recovery.

''Growth pattern of primary and intermediate goods, two leading indicators of industrial production are pointing towards a lackluster industrial performance in short- to medium-run,'' it said. ''This also means government and RBI will have to continue to support the demand.'' Inflation, it said, is expected to remain sticky, leading to the Reserve Bank of India (RBI) continuing with its accommodative policy stance throughout the 2021-22 fiscal.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, said any further increase in prices due to lockdown-driven potential supply constraints, continued depreciation of the rupee and continuing rise in commodity prices will remain a risk factor and may pose a policy challenge for RBI.

''However, the inflation levels are unlikely to trigger any action from RBI at this point given the increased risks of fresh lockdowns from the second COVID wave and the rising growth concerns.'' According to data released by the National Statistical Office (NSO), the rate of price rise in the food basket accelerated to 4.94 per cent in March, as against 3.87 per cent in the preceding month. Inflation in the 'fuel and light' category was 4.50 per cent during the month vis-a-vis 3.53 per cent in February.

Earlier this month, the RBI had projected the retail inflation at 5 per cent in the January-March quarter of 2020-21 and 5.2 per cent in the first two-quarters of the current fiscal.

After breaching the upper tolerance threshold of 6 per cent for six consecutive months (June-November 2020), CPI inflation fell in December 2020 and eased further in January 2021 to 4.1 per cent on the back of a sharp correction in vegetable prices and softening of cereal prices.

However, it rebounded to 5 per cent in February, driven primarily by base effects.

The Reserve Bank, which mainly factors in the retail inflation while arriving at its monetary policy, has been asked to keep CPI inflation at 4 per cent with a margin of 2 per cent on either side.

The central bank retained the key lending rate (repo) in its last monetary policy citing inflationary concerns.

The manufacturing sector -- which constitutes 77.63 per cent of the IIP -- declined by 3.7 per cent in February 2021, as per NSO data.

The mining sector output declined by 5.5 per cent in February 2021. However, power generation grew marginally by 0.1 per cent in the month under review.

The index had grown by 5.2 per cent in February 2020.

The industrial production had plunged 18.7 per cent in March last year following the COVID-19 outbreak and remained in the negative zone till August 2020.

With the resumption of economic activities, factory output posted a rise of 1 per cent in September. The IIP had grown by 4.5 per cent in October. In November 2020, the factory output fell 1.6 per cent, while it again entered the positive territory by growing 1.6 per cent in December 2020.

The IIP data for January 2021 has been revised to 0.9 per cent contraction from a 1.6 per cent decline, as per the provisional data released in March 2021.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)



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