Inflation hits 4-month high, IIP growth slumps as base effect again causes problems

CPI inflation and IIP growth are two of India’s most important high-frequency economic indicators.

India's official economic data can divide opinions at the best of times. Throw a rowdy base effect into the mixer, and the headline numbers for growth and prices can often be difficult to understand.

According to data released by the statistics ministry on January 12, Consumer Price Index (CPI) inflation accelerated to a four-month high of 5.69 percent in December, while the Index of Industrial Production grew at an eight-month low of 2.4 percent in November. Coincidentally, both numbers were lower than economists' expectations of 5.9 percent and 3.5 percent, respectively.

Of course, a smaller-than-anticipated rise in prices is a positive. The price momentum weakened, with inflation increasing from November's 5.55 percent because of an unfavourable base effect. And as the base effect fades, inflation will only fall.

"The January CPI inflation estimate is tracking at sub-5 percent, as the impact of adverse base wanes and softer food inflation led by winter season decline in vegetable prices," said Gaura Sen Gupta, India economist at IDFC First Bank.

The Reserve Bank of India (RBI) expects average CPI inflation to fall to 5.2 percent in the first quarter of 2024. Its forecast of 5.6 percent for October-December 2023 has already been undershot by 20 basis points.

Meanwhile, industrial growth was expected to fall sharply in November from its 16-month high of 11.6 percent in October thanks to the holidays the penultimate month of 2023 saw on account of Diwali. That the headline IIP growth number of 2.4 percent missed expectations of 3.5 percent is beside the point, as economists are not really looking at monthly industrial production data, but instead the average for October-November.

With Diwali occurring in November 2023 and in October 2022, the base effect has been rather wild, resulting in IIP growth jumping to 11.6 percent in October 2023 and then falling in the subsequent month.

Industrial production had contracted by 4.1 percent year-on-year in October 2022 before rising by 7.6 percent in November 2022.

If one takes the average for October-November 2023, the Indian economy is performing far better this year, with industrial output up 7.0 percent year-on-year in October-November 2023 compared to a growth of just 1.8 percent in the same two months of 2022.

Positives and negatives

This is not to say that there is nothing to learn from today's data.

Core inflation, or inflation excluding food and fuel items, continued its journey down south, falling to 3.9 percent in December from 4.1 percent the previous month, as per Moneycontrol's calculations. Reducing core inflation has been a key objective of the Reserve Bank of India's Monetary Policy Committee. But the continued fall – it stood at 6.1 percent at the start of 2023 – is puzzling to some economists.

"Declining core inflation at a time of strong economic growth is a conundrum," noted Sunil Kumar Sinha, principal economist, and Paras Jasrai, senior analyst, of India Ratings & Research.

The Indian economy is expected to grow by 7.3 percent in 2023-24, significantly higher than what most economists had predicted.

Also Read: RBI model pegs India's FY25 GDP growth at 6.0% vs official view of 6.5%

On the production side, of particular concern is the performance of consumer goods, both durable and non-durable. Over October-November, production of consumer durable goods was up 5.3 percent year-on-year, while that of non-durables was just 2.6 percent higher. These numbers compare favourably to October-November 2022, when the production for the two categories of goods was down 6.6 percent and 1.5 percent, respectively.

Nevertheless, Sinha and Jasrai of India Ratings are not impressed by the standalone November numbers, which saw the production of durables and non-durables shrink by 5.4 percent and 3.6 percent, respectively. According to them, the weak numbers point to the "prevalence of the anaemic consumption demand in the economy".

Then there are capital goods, whose output contracted by 1.1 percent after having grown by 21.3 percent in October. While the base effect played a role here, the contraction coincided with a drop in the government's capital expenditure.

The Centre's capex is down 9 percent year-on-year in October-November after having jumped 43 percent in the first half of 2023-24.