New Delhi: Retail inflation, as measured by the Consumer Price Index (CPI), grew at 4.1% in January 2021, in keeping with trend of moderating prices since November 2020. Industrial production, as measured by the Index of Industrial Production (IIP), grew at 1% in December 2020, a relief compared to the November numbers when it contracted by 2.1% on an annual basis.
These statistics, released on Friday, paint a mixed picture for the economy. While inflation will not be a worry for monetary policy considerations in the short-run, disproportionate fall in food prices could affect rural demand via the terms of trade route at a time when the non-farm economy is still in early stages of recovery, experts said.
The inflation numbers are in keeping with the RBI’s projection of a moderation in price levels, and lower than the 4.45% projection made by a Reuters poll of economists.
While they are a welcome change from the fact that inflation had been above the upper limit of RBI’s tolerance level of 6% between April-November 2020, the headline inflation number hides a divergent trend between food and non-food prices.
Food inflation has collapsed in the last three months—it grew at 9.5% in November 2020, 3.4% in December 2020 and 1.9% in January 2021. But core inflation, which measures non-food and non-fuel items in the CPI basket, continues to be high at 5.75% and has gained seven basis points—one basis point is one hundredth of a percentage point—between December 2020 and January 2021.
The sharp fall in food inflation is a result of a collapse in vegetable prices in the past two months. Vegetable prices contracted by 10.5% and 15.8% in December and January, respectively. Prices of cereals and products were flat with an annual growth of 0.1% in January 2021. To be sure, prices of some important food items such as pulses, edible oils and meat, fish and eggs continued to grow at double digit in January as well.
The collapse in vegetable and cereal prices, which are the most important items in the agricultural production basket, at a time when non-food inflation is high, do not augur well for rural demand said Himanshu, as associate professor of economics at Jawaharlal Nehru University.
IIP, the most important high-frequency indicator of industrial activity in the economy posted a growth of 1% in December 2020. This is a recovery when compared to the 2.1% contraction seen in November 2020, which came after a 4.2% growth in October 2020.
Of the three sub-components of IIP at the level of economic classification, mining continued to contract, while manufacturing grew at 1.6% compared to a contraction of 2% in November 2020. Electricity gained fresh momentum to grow at 5.1% in December 2020.
According to use-based classification, consumer goods were the biggest driver of growth with a 3.1% annual expansion in December 2020 compared to a 2.2% contraction in November 2020. Capital goods, intermediate goods and infrastructure goods sectors had positive growth, but it was less than one percent.
The muted performance of infrastructure and capital goods sectors is in keeping with a contraction of 1.3% in the index of eight core sector industries in December 2020.
Annual growth in IIP in the quarter ending December 2020 was 1% despite a favourable base-effect of 1.4% contraction in the quarter ending December 2019.
“IIP growth at 1% is a gentle surprise as our forecast was 0.1% against the backdrop of negative growth in the core industries. The situation has been buffered by an impressive performance of consumer goods – both durable and non-durable with an upward bias being provided by the base effect”, said Madan Sabnavis, chief economist at CARE Ratings.
“However, the pandemic impact shows on cumulative growth which has fallen by 13.5% and will probably end in a high single negative number if this positive growth is sustained”, he added.