Macro disappoints as inflation goes up & IIP slips: CRISIL

CRISIL Research report on Economy

Inflation in June crawled up to 5.4% from 5% in May due to a 70 bps increase in food inflation. Higher protein inflation – 9.7% in June compared with 8.2% in May - was behind the food inflation pick-up. Inflation in pulses crossed 22% in June as production has suffered largely a result of weak monsoons last year and damage to crops from unseasonal rains this year. So far, the monsoon scenario remains favourable with rainfall at 4% below long term average as on July 8, 2015. But, healthy and well-distributed rainfall in July and August months will be most crucial to watch. We go by Indian Meteorological Department’s (IMD) forecast of 12% deficient rainfall, but assume the distribution remains normal, and that the government undertakes proactive steps to contain food inflation. We therefore expect CPI inflation at 5.8% in 2015-16, down from 6% in 2014-15.

Industrial production growth inched down to 2.7% in May from 3.4% in the month of April. However, despite the volatility, IIP numbers have averaged at a higher level in 2015 – at 3.5% since January 2015 as compared to 1.4% in the five months prior to that. Therefore, IIP data suggests an improvement in industrial activity this year in comparison to 2014, so far. In May, IIP growth slowed as the manufacturing sector lost momentum on the back of weak performance of consumer oriented sectors. Unseasonal rains earlier in the year resulting in lower rural demand are weighing in on consumer goods. This is reflected in lower two wheeler and tractor sales in April and May. Therefore a favourable distribution of rainfall so far and deficiency at -4% of LPA – much lower than last year – is a welcome respite. Rainfall during the next two months will determine the fate of agriculture, rural demand and hence industry. For now, assuming rainfall deficiency of 12% but a favourable distribution of rainfall, we expect GDP growth to rise to 7.4% in FY16 with 1.5% growth in agriculture and 6.5% growth in industry.

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