Inflation, IIP Figures & Economy
Consumer Inflation rose to 10 month high in August,’19 primarily due to rise in prices of food items, while Wholesale Inflation remain unchanged. Retail Inflation remains below the mid-term target of 4%, much to the comfort of RBI. Retail Inflation for FY 2019-20 is estimated at 2.9% in Q1, 3% in Q2, 3.5% in Q3 & 3.8% in the last quarter. In the last policy meet, Monetary Policy Committee (MPC) had reduced the repo rate by 35 basis points to 5.45%, the fourth consecutive policy rate cut aimed at boosting the Industrial Output. This is the lowest repo rate in 9 years. The recent tax reforms are expected to have a positive impact on the economy and boost industry output.
RBI will closely monitor the developments in the coming months. MPC is hopeful of inflation remaining within the target range. Repo rate is expected to be reviewed in the next policy meet. Monetary Policy remains “Accommodative” for the current period.
Retail Inflation touched 10 month high of 3.21% in August, 2019, compared to 3.15% in the previous month. CPI is expected to remain below the mid-term target in the current Financial Year. The Food Inflation surged to 2.99% in August,’19 as compared to 2.36% in July,’19. Among food items, Inflation in protein rich food items such as Meat & Fish, Pulses and related products was significant. Crude Fuel and Power Inflation softened to (-) 1.70% from (-) 0.36% in the previous month.
Core Inflation for non food, non fuel items eased to 4.20% in August,’19.
Consumer Food Inflation has 47% weightage in CPI Index. CPI falling, which is attributed to higher weightage being given to retail prices, reflects the true impact of inflation on Common People. CPI stability is crucial for the economy.
WPI remained static at 1.08% in August,’19, when compared to previous month. Food Inflation spiked to 7.67% from 6.15% in the previous month. Crude prices declined (-) 4% when compared (-) 3.64% to the previous month. Manufacturing sector remained muted whereas, Primary Articles grew by 6.43% during the same period.
Core Inflation for August,’19 % turned negative for 1st time in 33 months as it fell to (-) 0.05% as compared to 0.2% in the previous month.
The new index provides Primary Articles with 22.62% weightage, 64.23% for manufactured products and power and fuel with 13.15%.
Index of Industrial Production (IIP) grew at 4.3% in July,’19 as compared to 6.5% growth witnessed last year. Moderation in Industry output is attributed to sluggish growth recorded in Manufacturing & Mining sector. The cumulative growth for the April-July,’19 is recorded at 3.3% in comparison to 5.4% growth observed in the corresponding period of last fiscal. Industrial growth is essential for creation of jobs and economic growth. Manufacturing, Electricity and Mining are the core components of the Industrial Output which is included in the new series as well. In the days ahead the performance of these sectors will be instrumental in the economic growth.
Power Sector stood at 4.8% while Mining witnessed 4.9% growth, Manufacturing Sector grew at 4.2% when compared to corresponding month of the last fiscal. Capital Goods contracted by 7.1%, while Consumer Durables witnessed negative growth of 2.7% during the same period. The Industrial Output is expected to expand in the coming months with Government introducing reforms to boost the economy.
13 out of 23 industry group in manufacturing sector have witnessed positive growth in July,’19.
Manufacturing Sector constitutes 77.6% of the new IIP index while 14.4% is allocated to the Mining sector and 8% to Electricity.
MPC’s may once again review the repo rate in the next meet following slow Industrial growth and weak demand scenario in the economy.
Low Inflation may be good for the end consumers but it also highlights low demand in the economy. Low consumption impacts the pricing power of producers, restricting influx of fresh investments and job opportunities.
Good Monsoon is crucial to keep Food Inflation under check.
Growth in Industrial output is essential for the economy, primarily in the Manufacturing sector.
CPI below the set target is a relief for the RBI.
Economy will also benefit from the easing of Crude Oil prices and Rupee/Dollar stability. However, recent issue in Saudi Arabia may impact the crude prices negatively.
Goods and Service Tax (GST) amendments are expected to have a positive impact on the economy. Businesses have responded to the reforms in indirect taxation. Higher Collection of Tax will be beneficial in bringing down the fiscal deficit.
Recent tax reforms are expected to boost economy but more investment and opportunities need to be generated to strengthen the economy.
Recent announcements providing tax relief to Foreign Portfolio Investors (FPI) and relaxation in FDI norms for single brand retail is expected to have a positive impact on the economy.
Slow GDP growth is a worrying factor for the Government. However, recent policy changes are expected to have a positive impact on the Economy.
Focus should also be on generation of jobs for the Young India, boost in jobs creation would be beneficial for the economy.
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