Positive trends in IIP | Retail Inflation continues to remain high

The Ministry of Statistics and Programme Implementation released the Index of Industrial Production numbers for January, 2020 and the retail inflation numbers for the month of February, 2020 yesterday.

Source: Ministry of Statistics and Programme Implementation (MoSPI)

After a negative growth in the previous month, the IIP growth recovered to 2.0% in January, 2020. It should be noted here the core sector growth also showed a positive trend in January, 2020. So overall there is a sign of revival of the economy. With the threat of Corona virus looming in the entire world economy it needs to be seen whether this sustains over time. In comparison with the same month last year, there is a substantial increase in the IIP for electricity. Mining and manufacturing also showed some increase in the growth rate as compared to the same month previous year.

Source: Ministry of Statistics and Programme Implementation (MoSPI)

The comparison of Apr-Jan, 2019-20 with the same in the previous financial year shows a dismal picture because of the slowdown that had impacted the economy since the last quarter of previous financial year. The April-Jan, 2019-20 numbers for IIP stood at 0.5% as against 4.4% in the same time in the previous financial year. Similar drop in growth is evident across all the three sectors, viz, mining, manufacturing and electricity.

Source: Ministry of Statistics and Programme Implementation (MoSPI)

The retail inflation rate as of February, 2020 stood at 6.58% as against 2.57% in the same month previous year. However this is lower than the inflation rate of the previous month. The inflation rate has been showing an increase trend since January, 2019. This is the first time in over 13 months, that we see a reverse trend. However the present rate of 6.58% is higher than the permissible range of inflation prescribed by RBI. So while inflation rate has declined with respect to the previous month, it is still at a very high range. It needs to be noted here that as per the budget, 2020-21, the nominal GDP growth is predicted to be at 10% for 2020-21. With over 6.5% inflation rate, this would mean that real GDP growth will translate into less than 4%. Moreover higher inflation in a time when the economy is facing a demand crunch proves to be more detrimental.

The inflation rate is highest for the food and beverages category which means that the impact of this rising inflation is all across the population across income strata. Food price index is as high as 10.81%.

A typical food basket for a vegetarian Indian household will have cereals, vegetables and pulses, while the same for a non vegetarian household will have meat, fish and egg in addition to the cereals , vegetables and pulses. The most severe increase in inflation rate is reflected in all the essential items which are typically in the food basket of an average Indian. The vegetable inflation is as high as 31%. This has shown a decline from the whopping 50% in the previous month. However the present rate is still very high. Moreover the inflation rate of spices has shown a increase this month. With higher inflation rate of vegetables, pulses, meat and fish, a rising inflation of spices would mean more burden in the pockets of an average Indian. This further can reduce the savings rate given people have to spend more on essential commodities and can have a adverse impact on future investment as well. It should be noted here that the gross capital formation has witnessed a negative growth as per the third quarter numbers for the current fiscal.

Both rural and urban India witnessed a decline in inflation rate as compared to the previous month. But the inflation rates are significantly higher when compared with the same month, previous year. The situation is more alarming in rural than in urban. This is the second month in a row where the rural inflation rate is higher than that of urban. This is an unusual phenomenon. A lot has been said about farm distress and lack of demand in rural economy. Higher inflation in rural India as compared to urban, makes the situation worse.

Overall the month of January has brought some cheers to the Indian economy with a positive growth in IIP and core sector growth. However the high retail inflation remains a huge concern specially with the high inflation rate of the regular food basket of an average Indian. The present scare of Corona Virus can have a huge impact on the world economy. It remains to be seen how it impacts the Indian economy. This will determine whether the present signs of revival of the economy will be sustainable or not.

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