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IIP drop not as bad as it looks, inflation not good either

The 4.2% contraction in Industrial output in October is not as bad as it looks; likewise the consumer inflation falling to 4.4% in November may not be as great as it looks.
First let me analyse the more stomach churning 4.2% contraction in industrial output in October. We can all recall that this October we got the largest number of public holidays ever. Dassera, Id, Gandhi Jayanti, Maharashtra election and Diwali all added up to a good 10 days of holidays.

Which means industrial output was at least one-third less than it tends to be in normal months. In fact even in 2011 when Dassera and Diwali occurred in the same month, the month on month fall in output was 3.7%. This time around it is a little over 5%, which can be explained by few more days of holidays because of Id and elections. The Nokia factory closing down also took its toll on the number finally. Without the fall in telephone instruments, the IIP would have been only 0.2% down, say many economists. Short point, the IIP number for October is a one-off. Output may likely rise sharply in November, especially because we already saw PMI rise to a 21-month high of 53.3 in Nov. Also car sales clearly showed an improvement.

This not to argue that industry is in fine fettle. All I am saying is, any knee jerk effort to pressure the RBI to cut rates may be unwarranted, especially when we know that several projects like gas based power projects and mining are suffering total inactivity for policy reasons, not because of rates.

Now, coming to CPI, consumer inflation was always expected to be below 5% simply because of the base effect. Nov 2013 had an inflation of 11.2%. As the base normalizes in January, inflation will surely rise above 5%. But let me not give the impression that the inflation data is not good news. The fall in vegetables, sugar, edible oils, Transport (because of petrol) and household requisites (again because of fuel prices) could be an enduring trend. Likewise the mild rise in cereals (despite a poor kharif) and in eggs, meat and fish also indicate some reduction in demand pull inflation. This probably reflects the fall in rural wages and the lower consumer buying power because of weak growth. However the signs of demand pull inflation can still be seen in the month on month increase in the prices of clothing, medicines, and education. They may decline in the months to come as rural buying power remains modest due to the muted rise in MSP or minimum support prices for the rabi season and due to some rationalisation in NREGS expenses. Slowdown in construction is also weaning away less rural labour and keeping wages subdued.  But these trends still need to be watched. I will also worry about two heavy food items: milk and pulses. Global milk inflation continues and milk prices have been rising sharply in India in Oct and Nov. So are pulses, though less than milk. These two weighty elements in the CPI can play spoilsport. Also the acreage sown in the rabi season is widely feared to be lower and hence an upward pressure in the hitherto dormant prices of wheat and other cereals cannot be ruled out.

In sum, inflation still needs to be watched. And industrial output, while not a great picture, can’t be tuned up with interest rates. The RBI governor was right in not cutting rates and he must not be hastened by the political authorities or India Inc. May be watching the inflation numbers till March will be a good idea. He would have some idea of the budget too by then. The credit policy likely on March 31 or on April 7 may be the right time.


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