Teji Mandi: Retail inflation, Industrial production drop in December 2020 - What does it mean to the economy?

04:14 PM Jan 13, 2021 | Teji Mandi

The industrial production and retail inflation data have come with a few signs for the economy. One indicates a positive trend, while the other one has negative implications. Broadly, they reflect upon the uneven recovery that the economy is witnessing.

Slump in mining and manufacturing leads to IIP contraction :


India's index of industrial production (IIP) contracted by 1.9% in November from 4.2% in October. The slump is the first one after a gap of two-months. It confirms that India's economic recovery remains patchy.


On a sectoral basis, mining and manufacturing productions were down 7.3% and 1.7%, respectively. Electricity production registered a strong growth of 3.5%.

The production of consumer durables fell marginally by 0.7%. And, the production of consumer non-durables and capital goods fell 0.7% and 7.1%, respectively. Production of infrastructure/construction rose marginally by 0.7%

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Retail inflation cools off:

The country has received some relief on the inflation front though. December's consumer price index (CPI) moderated to 4.59% from 6.93% in November.

The moderation is led by the drop in food prices led by a drop in vegetable prices. Food inflation moderated to 3.4% from 9.5% in November. Vegetable prices deflated by (-10.4%) while milk and milk products (4%), and cereals (1%) prices increased.

Meat, fish, eggs, and pulses prices also softened from the highs but continue to remain elevated. Meanwhile, fuel and light inflation rose to 3%.

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Core inflation remains elevated:

Core inflation, (Measuring growth in consumer price index after removing the food and fuel components), moderated slightly. But, it continues to remain elevated at 5.2% vs 5.4% in November.

Inflation in the personal care segment (11.7%) and transport and communication segment (9.3%). Prices of petrol (11%), gold (31%), and diesel (13%) were some of the major contributors.

IIP : Difficult to sustain in absence of demand :

The loss of momentum in industrial production could reduce the momentum of economic recovery. The pent up demand is waning away and the growth could moderate going ahead if the organic demand fails to show up.

Failure of demand sustainability could also lead to an inventory build-up. It could lead to further moderation of industrial production in the coming months.

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CPI : Moderation is a relief but further monetary stimulus unlikely

The moderation of retail inflation is a major positive. But, barring the vegetable prices, rest of the components continue to remain elevated.

The correction in food prices may help the MPC to revise down its inflation projections for the future. However, the possibility of further monetary stimulus is highly unlikely. At best, the RBI could look to speed up the policy normalization process if the deflationary trend continues.

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