RBI is focused on inflation and the government is running out of powder, with its revenue targets in question now.
The Index of Industrial Production (IIP) contracted 3.8% in October and manufacturing registered a contraction for the third straight month
Pricing power is a thing of the past in India, unless you are growing onions. A glance at the latest retail inflation shows that core inflation, which captures manufacturing and services activity, remained modest at around 3.5% for the third straight month in November.
Obviously, holding up prices is becoming difficult since Indians are not buying cars or even staples like they used to before. The massive 18% contraction in manufacture of consumer durables in October, within the industrial output data, shows that supply has shrunk due to a demand deceleration.
And the 22% decline in manufacture of capital goods shows that private sector investment remains in the doldrums.
The Index of Industrial Production (IIP) contracted 3.8% in October and manufacturing registered a contraction for the third straight month.
What’s more, the series of measures the government has announced seems to have had little impact on the ground so far.
The saving grace is that the 3.8% contraction in IIP in October was more or less along expected lines. In fact, the contraction was slightly lower than what economists had feared. This does not mean that worries over growth are receding. India’s producers have indeed lost their pricing power, as the core inflation data shows.
Headline retail inflation surged to a 40-month high of 5.54% in November, but the culprit was food inflation, onions in particular. Irrespective of the source of inflation, monetary policy is focused on the headline print. Recall that the Reserve Bank of India (RBI) governor had warned that food inflation will remain high after the central bank held rates steady in its latest meeting. Economists said inflation for December will be crucial, as it would show whether the RBI will pause on rates for a longer-than-expected period. Given that it is an inflation-targeting central bank now, the RBI has little incentive to cut rates in response to the slowing growth.
Weak growth and higher inflation have stoked stagflation worries in the market. “Overall, new data suggest continuation of the combination of weak growth and higher inflation. It is hard to tell yet if the recovery is strong enough to lead to higher than 4.5% growth in 3QFY20," wrote Nikhil Gupta, chief economist, Motilal Oswal Financial Services Ltd, in a note.
Remedies to boost growth are running out. The RBI is focused on its inflation target and the government is running out of powder to power up the economy, with its own revenue targets in question now. In short, the policymakers are finding themselves in a situation as complex and layered as an onion.
Source - Livemint