Finance

Aug IIP 6.4%, Sept inflation 4.4%: Why it is time for govt to push infra spending

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The jump in the index of industrial production (IIP) in the month of August to 6.4 percent from 4.1 percent in the preceding month, with notable improvement in segments such as consumer durables, mining, manufacturing and electricity, confirms the belief that gradual recovery is very much under way in the Indian economy.

The IIP numbers, per say, wasn’t a big surprise since the core sector data, which constitutes 38 percent of IIP, had indicated an uptick in economic activities (core sector grew by 2.6 percent in August).

But what is more encouraging is the visible improvement in capital goods, a measure of investment activity on the ground. This part has grown to 21.8 percent from 10.6 percent in the previous month.

Economists expect the factory output to continue to behave better in the coming months too due to the expected spike in consumer demand during the festival season.

The IIP has remained at subdued levels (near zero) in the initial part of last 12 months and slowly inching up thereafter on some improvement in economic activities. Typically, IIP numbers tend to be very volatile in certain components and, hence, it is risky to draw conclusion from one month’s data. This is, probably, the reasons why some economists sound cautious.

“There was broad-based pick-up in manufacturing, mining and electricity generation, signalling that supply-side constraints are being evened out gradually,” said Radhika Rao, Economist at DBS Bank Ltd.

“Supportive base effects, lumpy and volatile nature of this sector alongside distortions from a sharp jump in insulated cable/ rubber sub-component, influenced the headline print. Looking ahead, base effects will provide support to durables output, along with easing inflation and pullback in financing costs,” Rao said.

But, one must note that while the borrowing costs of large, top-rated companies have already come down in the money markets, where rates have eased significantly after the RBI offered a cumulative 125 bps cut so far this year, interest rates are yet to come down in a major way in the bank lending market.

The Reserve Bank of India (RBI), late last month, announced a higher-than-expected 50 bps cut, putting more pressure on commercial banks to pass on the rates to the end-consumer.

Though some banks have begun the transmission process, they have been reluctant for significant transmission — by adjusting spreads above base rate and moving slow on the base rate cut itself — citing poor demand and pile of bad loans on their books.

Retail inflation

The increase in Consumer price index (CPI) inflation in September to 4.41 percent from 3.74 percent in the preceding month was on expected lines. As Firstpost had noted before, fading base effect (on a lower base in the corresponding period last year, inflation will be higher this time, even though the quantum of rise will be the same) and increase in the prices of food and vegetable items on account of a deficient monsoon have put upward pressure on retail inflation.

“Crucial southwest rains were 14 percent below long-term average between June and September, with the fallout by far limited mostly to pulses and few common vegetables. This reflected in the notable 4.3 percent jump in food inflation in September, double the pace of the month before. A sharp month-on-month rise in vegetables (strongest pace in more than a year) and 30 percent jump in lentils were the main contributors,” Radhika said.

But the fact is that inflation has largely been a contained danger with the central bank confident of achieving its 5.8 percent target by January 2016. The short-term supply-side measures taken by the government to ensure supply of essential food items and increase in imports, should help the CPI to remain within the comfort zone of the central bank.

But, the larger point here is this: With improvement seen in the factory output and inflation gaining stability, it is even more critical for the government to now push public spending in infrastructure projects and get the asset quality and capitalisation issues of the banking sector sorted out at the earliest. These are important to keep the current momentum on.

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Nagaraju Tadakaluri
Nagaraju Tadakaluri is a Professional Web Designer, Freelance Writer, Search Engine Optimizer (SEO), Online Marketer, Multi Level Marketer (MLM) and Business Promoter. Have developed Latest Updates in hopes to educate, inform and inspire.

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