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IIP shrinks again, inflation accelerates

The rise in onion prices in the last five years is unmatched by any other commodity

The rise in onion prices in the last five years is unmatched by any other commodity  

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Food inflation is at a 40-month high

Industrial activity contracted for the third consecutive month in October by 3.8%, driven by a fall in activity across sectors, according to official data released on Thursday. 

Separate data showed that retail inflation had surged to a 40-month high of 5.54% in November, driven by rising food inflation. 

The Index of Industrial Production (IIP) had contracted by 4.3% in September and 1.1% in August. 

Growth in the Consumer Price Index (CPI) accelerated in November for the fourth consecutive month. It stood at 4.62% in October.

This combination of contraction in industrial activity and rising inflation has led experts to fear that India is entering a phase of stagflation (a situation in which there is persistent high inflation combined with stagnant or declining demand). 

“The momentum of IIP remaining in the negative zone has continued while CPI inflation, led by food and vegetable inflation, has crossed 5.5%,” D.K. Srivastava, chief policy adviser at EY India, said. “This is developing into a classic situation of stagflation.”

IIP shrinks again, inflation accelerates
 

Within the IIP, the mining sector shrunk by 8% in October compared with a contraction of 8.5% in the previous month. The manufacturing sector, similarly, contracted for the third consecutive month in October, by 2.1%, compared with a contraction of 3.9% in the September.

The electricity sector contracted sharply in October, by 12.2%, compared with a contraction of 2.6% in the previous month. The capital goods sector contracted for the twelfth consecutive month in October, by 21.9%, compared with a contraction of 20.7% in the previous month.

The infrastructure sector, too, saw continuing contraction, of 9.2% in October, compared with a contraction of 6.4% in the previous month. Activity in the consumer durables sector contracted sharply in October, by 18%, compared with a contraction of 9.9% in September. In the consumer non-durables sector, activity contracted by 1.1% compared with a contraction of 0.4% over the same period. 

“The growth story is driven by a continuing fall in demand, and the inflation spike is driven by seasonal factors,” Mr. Srivastava added. “If the government had anticipated this well in advance, it should have filled in the gaps by imports and inflation would not have spiked.”

Rising inflation

Within the CPI, food inflation climbed to a historic high of 8.66% in November compared with 6.93% in October, which itself was a 39-month high. However, inflation in all other major categories in the Index eased in November.

Inflation in the pan, tobacco and other intoxicants sector eased in November to 3.26% compared with 3.92% in the previous month. The clothing and footwear sector saw inflation slowing to 1.3% in November, compared with 1.65% in October.

Similarly, inflation in the housing sector eased to 4.49% in November compared with 4.58% in the previous month. The fuel and light segment saw a contraction of 1.93% in prices in November, compared with a contraction of 2.02% in October.

“Although the stance is accommodative, I don’t see the Reserve Bank of India cutting rates in the next review because inflation is high and they target inflation far more than growth and right now CPI is inching closer to the RBI’s upper limit,” Mr. Srivastava said.

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Printable version | Jan 25, 2020 12:53:55 AM | https://www.thehindu.com/news/national/retail-inflation-soars-to-over-3-year-high-of-554-on-costlier-food-items/article30287926.ece

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