Election overhang: On economic activity
Inflation remains a concern as price pressures broaden beyond food
Production in India’s eight core infrastructure sectors remained largely dampened by the impact of a slowdown in state spending on public works in June, when the general election ended in the early part of the month leading to the formation of a new government at the Centre. The heatwaves that had impacted a wide range of economic activity in the country’s northern and western parts in May, extended into June, adding to the overall slowdown in industrial production. Provisional data on the Index of Eight Core Industries (ICI) released by the Commerce and Industry Ministry on July 31 show output in five of the sectors suffered either sharp decelerations in growth or contracted from the year-earlier period, resulting in overall core sector growth slowing to a 20-month low of 4%. While the output of refinery products, which at 28% has the heaviest weight on the ICI, contracted year-on-year for the first time in five months, and shrank by 1.5%, electricity generation declined by 3.6% from May’s all-time high level. The YoY expansion in the key electricity sector, which has the second-heaviest weight of about 20%, almost halved in pace to 7.7%, from May’s 13.7%, as the start of monsoon rains in some parts of the country helped ease power demand. However, June’s debilitating heatwaves, which the India Meteorological Department pegged at a 14-year high, sapped demand for steel as construction activity struggled to regain traction amid the scorching temperatures. Steel output slid 4% from the preceding month, depressing the YoY growth to just 2.7% following May’s 6.8% pace. Coal offered the silver lining, as output growth accelerated to 14.8% in June, from May’s 10.2%.
The more contemporaneous private survey-based HSBC India Manufacturing Purchasing Managers’ Index (PMI) for July appears to signal that manufacturing activity at a broader level eased marginally last month. Slightly softer increases in new orders and output resulted in July’s PMI easing to 58.1, from 58.3 in June, the survey of purchasing managers at about 400 manufacturers by S&P Global shows. However, more than the marginal slowing in manufacturing activity, the PMI survey’s truly disconcerting finding is that a significant strengthening in input costs led manufacturers to raise selling prices at the steepest rate in almost 11 years. With goods producers reporting having paid more for coal, packaging, paper, rubber and steel, the outlook for broader inflation — both at the wholesale and retail levels — is far from reassuring. The Reserve Bank of India’s Monetary Policy Committee, which will meet to review its interest rate stance this week, has its task cut out. With clear signs that price pressures are broadening beyond food, policymakers can ill-afford to drop their guard in the battle to tame inflation.