The latest sets of data on industrial output and retail inflation are beguilingly heartening, with the former showing a double-digit year-on-year increase in production, and the latter positing a sharp slowdown in price gains. The Index of Industrial Production (IIP) and Consumer Price Index (CPI) figures released on Tuesday show industrial output rose 11.9% in August, while inflation in September slowed by 95 basis points from the preceding month to 4.35%. The numbers seem to indicate a gathering recovery in economic momentum, even as CPI-based inflation eases towards the RBI’s mandated target of 4%. The IIP constituents — mining, manufacturing and electricity — posted appreciable improvements of 23.6%, 9.7% and 16%, respectively. But a closer look shows the production figures were buoyed substantially by the contractions that occurred last year when the economy was still struggling to recover from the first COVID-19 lockdown. The eroded base in the case of the August 2020 IIP data disguises the fact that output actually shrank 0.2% on a month-on-month basis this year with mining and manufacturing, which together account for 94% of the index, posting sequential contractions of 0.8% and 0.5%, respectively. Only consumer non-durables and construction goods posted increases from July. The slowdown in the consumer durables category reflects the lack of demand for white goods amid the pandemic.
With last fiscal’s IIP numbers showing output rebounding in September-October 2020, and some industrial sectors, including automobile manufacturing, hit this year by raw material shortages and logistic constraints, it is hard to see production sustaining the pace of growth. Inflation too has benefited from the elevated levels in the year-earlier period when the headline reading had accelerated to 7.3% in September 2020, and subsequently touched 7.6% last October. The CPI data mask the real extent of price pressures across major product categories. Undermining nutritional security especially among the sizeable number who have suffered job or income cuts, key protein sources including meat and fish and pulses and products recorded provisional inflation of 7.99% and 8.75%, respectively, while the vital cooking medium of oils and fats saw price gains accelerate to a punishing 34.2%. Transport and communication, which captures pump prices of petrol and diesel, also stayed stuck close to double digits at 9.5%. With global crude oil ruling near three-year highs, unless the Central and State governments deign to respond to the RBI’s entreaties and cut fuel levies, there is little scope for inflation easing by much in this category. The coal crisis that is roiling power output is sure to also ripple across sectors and undermine price stability unless policy makers intervene post haste.
