Industrial activity sustained a double digit growth for the fourth straight month in August, right before the coal shortage hit the economy, while retail inflation eased to a five month low in September.
The economic cheer, however, may be short-lived with economists cautioning of a sharp deceleration in manufacturing activity going forward due to the coal shortage-led power deficit. Inflation is expected to flare up on account of rising energy and commodity prices.
Index of industrial production was up by 11.9 per cent in August on a year-on-year (YoY) basis, marginally higher than 11.4 per cent in the previous month, data released by the National Statistical Office showed on Tuesday.
Mining activity posted a stellar 23.6 per cent growth in August, before excess rainfall impacted coal output in September, leading to a power crisis situation in the country. Electricity production rose by 16 per cent during the month compared to a 1.8 per cent decline in the corresponding period of previous year. But a power crisis is looming large with coal stocks in power plants falling to significantly low levels and states warning of power blackouts. Nearly two-thirds of India's coal-fired power plants have stockpiles of a week or less.
Manufacturing, which makes up for 77 per cent of the IIP, posted a 9.7 per cent growth in August, compared to a 7.6 per cent contraction in the previous month
Economists expect a sharp deceleration in industrial activity going forward.
"With the excess rainfall affecting mining, electricity, and construction activities, and the non-availability of semiconductors impinging upon auto output, we expect the IIP growth to dip sharply to 3-5 per cent in September 2021" argued Aditi Nayar, chief economist, ICRA Ltd.
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But, the healthy GST e-way bill generation for early October 2021 suggests inventory buildup ahead of the festive season, which augurs well for the IIP print for the current month, even as continued constraints in the auto sector and the looming concerns on availability of coal and power pose risks, added Nayar.
The IIP growth was 3.9 per cent higher in August compared to the pre-Covid-19 level of August 2019. "It was led by all the categories except consumer durables, highlighting the enduring impact of the pandemic on big-ticket demand," said Nayar.
Sunil Kumar Sinha, Principal Economist, India Ratings and Research, is of the opinion that the journey from here on would not be without hiccups. "Firstly e-way bills are suggesting slight moderation in domestic economic activity, secondly the emerging power crisis due to domestic coal shortages, and thirdly the disruption in global supply chain due to energy crisis in Europe and China, [these] could become a spoiler."
Capital goods output, which reflects private sector investment, grew by nearly 20 per cent in August. While consumer durables and consumer non-durables grew by 8 per cent and 5.2 per cent each, respectively. Only three of the 23 sub-sectors posted a decline --- computer and electronics, motor vehicles, and transport equipment.
Inflation, based on the consumer price index (CPI), moderated to 4.35 per cent in September from 5.3 per cent in the previous month on the back of softening food prices and high base effect.
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Food inflation fell to a 29 month-month low of 1.6 per cent in September from 3.7 per cent in August and 9.8 per cent in September last year. In fact, food inflation cooled to a four month low, led by declining cereals and fruits, and vegetables prices. Deflation in vegetables continued for the 10th straight month, widening to 22.5 per cent. Meanwhile, inflation in pulses fell to a 5-month low of 8.75 per cent during the month on account of a high base of 14.7 per cent in the same month last year.
Fuel and light inflation at 13.6 per cent was in double digits for the fifth straight month. Core CPI inflation picked up marginally to 5.99 per cent on the back of rise in oil prices and high corporate input costs. "The hike in prices of petrol and diesel is likely push inflation higher in this segment," said Madan Sabnavis, chief economist, CARE Ratings.
Sinha of India Ratings said that high crude oil prices and disruption in domestic/global supply chain due to energy/power crisis may pose upside risk to retail inflation. "High crude oil prices and hike in LPG cylinder rates is expected to keep fuel prices at the elevated levels.Yet in view of the growth concerns we believe that RBI would stay put on policy rates in the remaining months of FY22."
Madhavi Arora, Lead Economist, Emkay Global Financial Services, pointed out that supply-side bottlenecks, higher energy and commodity inflation, and high pump prices could pose an upside pressure on inflation. Whereas, while favourable base effect and managed food inflation will see inflation further going down.
Ten out of 21 states have reported an inflation higher than the all-India retail inflation for the month.
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