Budget 2016: High inflation and slow industrial growth present obstacles to FM Arun Jaitley
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Industrial growth contracted for a second month in December while retail Any attempt to raise government spending to spur growth could force a delay in further
The Index of Industrial Production (IIP) fell 1.3 per cent in December after a revised 3.4 per cent decline in November, according to data released by the statistics office on Friday. The November fall had been previously pegged at 3.2 per cent. The slump was partly because of floods in Chennai, a major manufacturing hub.
The separately released consumer price index (CPI) showed retail inflation at 5.69 per cent in January, the highest since August 2014, making for a toxic mix of macro numbers at the start of the new calendar.
"As both high-frequency data show deterioration, deterioration, the macroeconomic management of the economy by the government as well as RBI is going to be more difficult ahead, particularly when the
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The data also highlighted the disconnect between
Car sales fell 0.72 per cent in January, the first decline 15 months. GDP data released on Monday had showed a growth of 7.3 per cent for the December quarter and an outstanding 12.6 per cent growth in manufacturing. But manufacturing contracted 2.4 per cent in December, according to IIP data.
Manufacturing accounts for 75.5 per cent weight in IIP. "The marginal 0.9 per cent volume growth in the manufacturing sector in Q3FY16 stood in sharp contrast to the growth of value addition revealed by the GDP data (12.6 per cent at constant prices and 10.9 per cent at current prices), which benefitted from lower input costs," said Aditi Nayar, senior economist, ICRA.
The spike in inflation is largely because of food inflation which accelerated to 6.85 per cent in January from 6.4 per cent in the previous month, making a rate cut difficult when RBI reviews monetary policy on April 5. Any relaxation of fiscal targets by the government in the Budget would all but rule out a rate cut. Some policymakers favour a relaxation in the fiscal consolidation target of 3.5 per cent for FY15 to create room for more government spending while meeting pay commission obligations. "Presuming a normal monsoon in 2016 and fiscal consolidation along the previously announced trajectory, ICRA expects CPI inflation to average 5.5 per cent in FY17, allowing for a final 25-basis-points cut in the repo rate during 2016," said Nayar.
Image credit: Indiatimes
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