The latest data on inflation and industrial production, which was released by the National Statistical Office (NSO) on January 12, has once again raised a red flag, especially against the long shadow of the ongoing third wave of the Covid-19 pandemic in the country.
Retail inflation, as measured by the Consumer Price Index (CPI), grew at 5.6% in the month of December 2021. While the latest inflation reading is slightly lower than the 5.8% forecast by a Bloomberg poll of economists, it is still 68 basis points – one basis point is one hundredth of a percentage point – higher than the November 2021 reading. Index of Industrial Production (IIP) growth moderated to just 1.4%, significantly lower than the 2.8% projection by a Bloomberg poll of economists. The latest IIP reading is also a sharp fall from the October 2021 growth of 4%.
Experts believe that the latest numbers are a cause for concern as rising prices will put a greater squeeze on disposable incomes, which, in turn, will generate additional headwinds for what seems to be already weakening state of aggregate demand. The third wave’s disruption is only expected to make matters worse.
At 5.6% in December 2021, annual growth in CPI is the highest since July 2021. December was also the third consecutive month when annual inflation rate has inched higher. A disaggregated look at the data shows that inflation has been becoming broad based with non-core inflation – the food and fuel component of the CPI basket – gaining momentum even as core inflation continues to be high. December 2021 was the fourth consecutive month when core inflation was above 6%. Non-core inflation, on the other hand, has increased from 2.5% to 5% between September and December 2021. Food inflation, which accounts for 39% of the CPI basket has picked up as well. It was 4.1% in December 2021 against a value of 1.9% in November. Rise in food inflation is a result of prices of almost all food items except vegetables increasing.
“Will there be any pressure for inflation to ease in the Omicron weeks? We think not. Core inflation has been sticky at over 5% since early 2020, over both the first and the second wave. With oil prices even higher now, we don’t see any reason why inflation should fall over the third wave”, Pranjul Bhandari, Chief India economist at HSBC research said in a note on January 10. At 128.5, the November 2021 IIP value was not just lower than the October 2021 value of 134.8 but also marginally lower than the corresponding pre-pandemic (November 2019) value of 128.8. The fact that consumer durables suffered the biggest sequential (month-on-month) contraction supports the thesis that pent-up/festive demand imparted a seasonal boost to economic activity in October. On a year-on-year basis manufacturing had the most muted growth among the three sub-categories of mining, manufacturing and electricity. When read with the fact that both manufacturing and services Purchasing Managers’ Index (PMI) have shown a moderation in December as well, the November IIP trends paint a worrying picture.
“The economy is still in the midst of both anaemic investment and consumer demand. This can be inferred from the fact that both capital and consumer durable goods, despite a favourable base recorded a de-growth of 3.7% and 5.6% in November 2021. It appears that the nascent recovery is still facing headwinds resulting in all the sectors at the use-based level falling short of the pre-Covid level in November 2021”, Sunil Kumar Sinha, Principal Economist, India Ratings said.
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