Consumer inflation declines to 2-year low; Industry growth positive after 4 months; rate cut expected

Nrw Delhi: India’s flagging economy delivered rare good news on Wednesday with a slight expansion of industrial production and further cooling in consumer prices, offering some respite to the ruling coalition before next month’s general election.

Improved consumer demand helped industrial output expand 0.1 per cent on year in January, the first growth in four months, data from the federal statistics ministry showed on Wednesday.
Analysts had forecast a contraction of 0.6 per cent in output. The fall in December’s output was revised to 0.17 per cent on year from 0.6 per cent earlier.

Separately, retail inflation eased for the third straight month to a 25-month low of 8.10 per cent in February from 8.79 per cent in the previous month on moderating vegetable prices.
“Today’s data show India’s beleaguered economy moving in the right direction, but still far from healthy,” said Miguel Chanco, India Economist at Capital Economics in Singapore.

The data showed production of consumer goods, a proxy for consumer demand, contracted an annual 0.6 per cent in January, an improvement from a 4.7 per cent drop a month ago.
Asia’s third-largest economy has been struggling to recover from a stagflation-type situation where economic growth has been stuck below five per cent for the past seven quarters while price continue to rise at a fast clip.

Cooling prices will offer some relief to the government headed by the Congress. It is still widely expected to be defeated, in part for its failure to control inflation and revive the economy.
Hail and heavy rains in the past two weeks have damaged crops, which could see food prices spike again. An uncertain outlook for this summer’s monsoon rains due to the El Nino weather pattern is also worrying analysts.

“Food ... prices are going to go up again because of unseasonal rains and hail storms in some parts of the country,” warned D.H. Pai Panandiker, president of RPG Foundation, a private think tank. “It appears that food prices will start going up in the next weeks as agricultural output may suffer.”

Purchasing managers indexes are already pointing to underlying inflationary risks as rising input costs last month, thanks to higher raw material prices and wage increases, forced firms to pass on them to their clients. This is likely to keep retail inflation elevated.

In an attempt to quell price pressures, Reserve Bank of India governor Raghuram Rajan has raised interest rates three times since September, even though economic growth is languishing at around a decade-low of 4.5 per cent. The central bank is next due to review rates on April 1.