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India’s economy seems to be returning to a high-growth low-inflation sweet spot after a two-month scare. Both inflation and industrial production numbers for the month of September and August – they were released by the National Statistical Office (NSO) on Thursday – positively surprised analysts. To be sure, whether or not the economy will find this sweet spot will depend on an uneven monsoon’s impact on non-perishable food production at home, and the trajectory of crude oil prices in the aftermath of Hamas’ surprise assault on Israel last weekend.
India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI) stood at 5% in September 2023, significantly lower than the 6.8% and 7.4% readings in the months of August and July. The September inflation print is 38 basis points – one basis point is one hundredth of a percentage point – lower than what was projected by a Bloomberg poll of economists.
The September CPI number also means that the September quarter CPI number is now 6.4%, exactly what RBI’s Monetary Policy Committee said it would be in its October resolution released earlier this month. To be sure, RBI had revised its September quarter inflation forecast by 1.2 percentage points between its June and October resolutions. RBI’s annual inflation forecast for 2023-24 now stands at 5.4%.
The driving factor behind a moderation in headline inflation number is a sharp correction in vegetable inflation, which has fallen from 37.4% in July to just 3.4% in September. This has brought down food inflation from 10.6% in July to 6.3% in September. That edible oil prices have continued to contract on an annual basis for the eighth consecutive month has also helped the cause.
Parts of the food basket continue to be a cause for concern. Cereal inflation was in double digits for the 13th consecutive month in September, and pulse prices are showing a sharp increase with annual inflation increasing from 6.6% in May 2023 to 16.4% in September. Inflation for sugar, spices, fruits and meat, fish and eggs sub-categories also shows an increasing trend in September.
Thanks to a reduction in prices of LPG cylinders by the government in the last week of August, inflation in the fuel and light category actually contracted by 0.1%, making it the first such contraction since November 2019. Whether or not this trend will hold depends on crude oil prices which have entered a volatile period with a geopolitical crisis in West Asia which accounts for a third of global oil production.
“Even if retail petrol and diesel prices remain unchanged (as they have been since August 2022), CPI inflation could rise by 0.25ppt for every USD10/b rise in global oil prices, led by the price increase in the market-linked components of the energy basket, such as kerosene, LPG, and electricity. If petrol and diesel prices are raised as well, the inflation impact is likely to be even higher, at around 0.35ppt”, HSBC chief India economist Pranjul Bhandari had said in a research note dated October 4. India’s crude oil basket was priced at $88.2 per barrel on October 11.
The uncertainty around non-perishable food and energy prices notwithstanding, one number which will give a lot of relief to the markets and policy makers is the core inflation print of 4.8% in September 2023, the lowest this number has been since June 2020. Core inflation measures the non-food non-fuel component of the CPI basket and is believed to more immune to seasonal fluctuations and considered to be a good metric for whether or not an economy is overheated.
The Index of Industrial Production (IIP), thanks to a low base last year, grew at 10.3% in August. What makes this number impressive is the fact that it was 1.2 percentage points higher than the number given by a Bloomberg poll of economists. Manufacturing, which accounts for more than three-fourth of the IIP basket grew at 9.3% in August. A use-based classification of IIP shows an across-the-board growth in primary goods, capital goods, intermediate goods, infrastructure goods and consumer goods.
The fact that both consumer durables and non-durables have shown a positive growth in August is of significance and needs to be tracked going forward as the former could denote a strong festive season consumer demand. The government reported a 22% increase in direct tax collections (net of refunds) in the first half of the fiscal year on October 10 which suggests that disposable incomes of at least a section of the workers has been rising.
Experts expect the economy to lose some growth momentum going forward on account of external headwinds. “Industrial activity is expected to remain resilient but lose steam in the coming months. The PMI for manufacturing moderated to 57.5 in September from 58.6 previous month. In the coming months, the external environment will be a drag, as major western economies decelerate in the second half of 2023. The impact of uneven monsoon on rural demand remains to be seen. The transmission of rate hikes to lending rates could also temper domestic demand in the second half”, Dipti Deshpande, principal economist, CRISIL, said in a research note.
RBI’s MPC has forecast a GDP growth of 6.5% for 2023-24. October World Economic Outlook numbers released by IMF revised India’s 2023-24 GDP forecast to 6.3% from their July projection of 6.1%.
“Despite today’s softer print, we maintain our FY23-24 inflation forecast at 5.4% given possible risks from global oil prices seeping into core CPI and the continued increase in non- perishable food prices. CPI inflation has returned to the RBI’s target band of 2-6% after two months of breaches driven by volatile vegetable prices. Taking today’s data and early price indicators for October into account, we are tracking CPI inflation at 4.6%, back in the 4% handle after three months. Still, the RBI maintains focus on returning inflation back to the 4% target, suggesting no pivot by the MPC is likely anytime soon. For FY24-25, we continue to project CPI inflation to moderate to 4.8%,” said Rahul Bajoria, head of EM Asia (ex-China) Economics Research, Barclays.
Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.