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IIP growth indicates steady festive demand and some boost from base effect

IIP growth

IIP growth – The holiday season is expected to see solid demand, with industrial output growing by double digits in August and retail inflation dropping in September, providing comfort to consumers. 

Industrial activity, as measured by the Index of Industrial Production (IIP), increased by 10.3 percent year on year in August, a 14-month high. Significantly, the manufacturing sector expanded by 9.3 percent, while consumer durables and non-durables expanded by 5.7 percent and 9 percent, respectively, in the use-based classification. 

In the meantime, retail inflation, as assessed by the consumer price index, fell to 5.02 percent in September from 6.83 percent the previous month. This was due to a steep drop in vegetable costs and a reduction in gasoline prices, but consumer food price inflation remained high in September, at 6.56 percent, compared to 9.94 percent a month earlier. 

According to experts, the increase in IIP growth was largely due to the base effect, as it dropped by 0.7% in August 2022.  However, given the context of other high-frequency indicators, it predicts that demand will be strong during the holiday season. 

“The rapid growth in IIP is consistent with the high levels of PMIs and GST collections.” “The next two months should ideally see sustained growth if rural demand revives—this has been a gap so far,” said Madan Sabnavis, Chief Economist, Bank of Baroda, noting that use-based classification shows that durable goods have registered positive growth for the first time, though it is still higher than the -4.4 per cent growth recorded last year. However, it has to be seen whether such optimism is reflected in India Inc’s second-quarter sales, he cautioned.  

IIP growth

Experts, however, were cautious about the prospects for retail inflation, citing the sustained high food inflation, particularly in pulses and grains, which were 16.38% and 10.95%, respectively, in September.   

“Our projections indicate that headline CPI inflation will remain volatile in a wide range until June 2024, with the outlook for food inflation remaining uncertain and crude oil prices continuing to fluctuate.” Nonetheless, further monetary tightening is not justified in the short term, given the economy’s sustained sluggish transmission of previous rate hikes,” Nayar noted.