GROWTH SLOWS AND RETAIL INFLATION FALLS

By Ruma Dubey

Retail inflation for June’17 was down to 1.54% while IIP for May’17 fell to 1.7% v/s 2.8% (MoM). Sp growth is down and inflation is also down.

We in India celebrate every time we see a lower inflation rate while the developed countries are working towards increasing inflation. So are we missing a point here? That’s the thought which comes to mind with MoM lower inflation.

In economics, lower prices consistently combined with lower growth is not good as inflation reduces the value of money, people still do not want to spend it, prefer to sit on the cash. People feel that prices could come down further and hence wait. Companies are also likely to sit on cash as they feel it is less profitable to produce as it gives them lower real returns. They cut down on production and new investments and spike up unemployment. Thus consistently lower inflation feeds lower growth. Inflation can be pro-growth but only when it is not unusually high where then it starts working like the way persistent deflation does.

The inflation that we are seeing is probably only in vegetables and fruits; the rest remains benign and that is a pointer to the fact that consumption is simply not happening. That is exactly what the IIP numbers also indicate with manufacturing slowing down below 1.5%. The lower inflation is thanks to GST which forced many to offer discounts, leading companies to de-stock and clear-up inventory before 1st of July kicked in. So this is more on account of a one-off situation; we need to wait and watch how CPI comes in for July – this might also be lower given the spillover of GST.

The BIG question as always is what RBI will do in August credit policy? It is unlikely that rates will be lowered – as such banks have lowered rates but no one is biting as there is simply no demand; with no new investments coming in, no robustness seen in manufacturing, this lack of demand does not come as a surprise.

RBI is more agnostic and it will need more confirmation about two things – at least some of food disinflation and pulses is real and it will wait till  GST settles down and would prefer to wait and see its impact. Thus October is more like it.

How do we get corporate confidence up? That has to be the biggest question and not whether or not RBI will reduce or increase rates. RBI has been doing its job very well, with absolute diligence but the laggard causing this failure is obviously the Govt.  Very real supply constraints have developed like in infra, mainly land acquisitions which does not require big bang reforms. The fall in manufacturing is alarming and this is a direct consequence of the fall in investments and many projects getting stalled.

In the IIP for May, in terms of industries, twelve out of the twenty three industry groups in the manufacturing sector have shown positive growth during the month of May 2017 as compared to the corresponding month of the previous year. The industry group ‘Manufacture of pharmaceuticals, medicinal chemical and botanical products’ has shown the highest positive growth of 24.5 percent followed by 24.4 percent in ‘Other manufacturing’ and 11.8 percent in ‘Manufacture of other transport equipment’. On the other hand, the industry group ‘Manufacture of beverages’ has shown the highest negative growth of (-) 16.5 percent followed by (-) 15.1 percent in ‘Manufacture of motor vehicles, trailers and semi-trailers’ and (-) 15.0 percent in ‘Manufacture of electrical equipment’.

Some important items showing high positive growth during the current month over the same month in previous year include ‘Digestive enzymes and antacids (incl. PPI drugs)’ (90.5%), ‘Textile machinery’ (51.8%), ‘Meters (electric and non-electric)’ (48.7%), ‘Jewellery of gold (studded with stones or not)’ (36.7%), ‘Industrial Valves of different types- safety, relief and control valves(non-electronic, non-electrical)’ (32.8%), ‘Telephones and mobile instruments’ (29.2%), ‘Aluminium Billets/ingots’ (23.6%) and ‘Tea’ (21.8%).

Some important items that have registered high negative growth include ‘API & formulations of hypo-lipidemic agents incl. anti-hyper-triglyceridemics; anti-hypertensive’ [(-) 72.8%], ‘Air filters’ [(-) 63.7%], ‘Shelled cashew kernel, whether or not processed/ roasted/ salted’ [(-) 63.3%], ‘Axle’ [(-) 47.0%], ‘Plastic jars, bottles and containers’ [(-) 41.1%], ‘Kerosene’ [(-) 40.6%], ‘Rice (excluding basmati)’ [(-) 36.1%],   ‘Tooth Paste’ [(-) 33.8%], ‘API & formulations of vitamins’ [(-) 32.0%], ‘Electrical apparatus for switching or protecting electrical circuits (e.g switchgear, circuit breakers/switches, control/ meter panel)’ [(-) 29.5%], ‘Commercial Vehicles’ [(-) 26.5%] and ‘Beer & other undistilled and fermented alcoholic liqueurs other than wines’ [(-) 24.9%].

The challenge remains – how does India Inc get back onto the growth track?