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IIP Growth At 12-Month High Of 19.6% As Key Sectors Show Signs Of A Rebound

IIP growth highest of 12 months

IIP growth of 19.6% is higher than our expectation of 14.5%, but has been statistically driven with all components witnessing high growth rates. Within manufacturing barring pharma, which had negative growth, all industries posted impressive growth. This was also reflected across the primary, intermediate and infra goods. Within consumer goods, non-durables registered feeble growth of 0.9% which can be attributed to the inflation impact as companies have been passing on input costs which in turn could have impeded consumption.

The CPI inflation number at 7% is just about within our expectations of 6.8%.

1.   Inflation continues to be broad based which is a worry. With the exception of housing all other segments have registered inflation of above 6%.

2.   The food and beverages basket is a worry at 7.6% with vegetables registering growth of 17.4% followed by vegetable oils and fats and fish products. There appears to be little respite here. The move to lower duties should help in lowering prices of oils though inflation would continue to be high.

3.   Fuel and light had inflation of 10.4% which is again very high.

4.   The miscellaneous category also witnessed high inflation of 6.3% with household goods, transport and recreation being 7% plus. This is typically the category of goods and services which drives non-discretionary consumption which will be under pressure if inflation persists. 

5.   The other interesting thing about inflation is the variation cross states – half of the 22 had inflation above 7%. The lowest was in Bihar at 4.7% and the highest in Telangana at 10%. Such noise is noteworthy as it shows how prices range – driven by food products mainly and general cost of living. 

6.   Based on this number, there will be less solace for monetary policy and another rate hike may be expected albeit of 25 bps. The future trajectory would also tend to be above 6.5% with the base effect becoming weaker statistically.

Overall IIP growth should be viewed with caution even though the cumulative two month performance of 12.9% is impressive. The future course will depend on how consumption fares which will be driven by inflationary trends. As households spend more on necessities, there could be cut back on non-discretionary spending as prices rise. This can be a stumbling block for industrial growth. The infra based industries are likely to sustain with government capex leading the way. But to be sustained we need to see private investment also pick up which is still feeble today.

Also Read: TCS says no visible sign of recession yet, but deal sizes shrinking

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