Retail Inflation Eases Amid Sluggish Industrial Growth
In January, India witnessed a notable decline in retail inflation, reaching its lowest level in five months. This easing of inflation comes as a relief to policymakers who have been grappling with persistent price pressures. The moderation in vegetable prices played a significant role in this development. However, the industrial output growth has shown signs of slowing down, primarily due to a lackluster performance in the manufacturing sector. Recent data from the National Statistical Office (NSO) highlights these trends, revealing a complex economic landscape that requires careful navigation.
Decline in Retail Inflation
According to the latest figures from the NSO, retail inflation, measured by the Consumer Price Index (CPI), rose by 4.3% in January. This marks a decrease from 5.2% in December and is lower than the 5.1% recorded in January of the previous year. The data indicates that rural inflation stood at 4.6%, while urban inflation was slightly lower at 3.9%. A significant factor contributing to this decline is the food price index, which slowed to 6% in January, down from 8.4% in December.
The NSO reported a decrease of 91 basis points in inflation from December to January, marking the lowest year-on-year inflation rate since August 2024. Notably, food inflation saw a sharp decline of 237 basis points compared to December, indicating a positive shift in the food market. Vegetable prices, which have been a major contributor to overall CPI inflation, eased significantly, dropping to 11.4% in January from 26.6% in December. Rajani Sinha, chief economist at CareEdge, noted that excluding vegetables, CPI inflation averaged just 3.6% since January 2024, well below the Reserve Bank of India’s target of 4%.
Factors Behind the Easing of Inflation
Several factors have contributed to the easing of inflation in recent months. The decline in vegetable prices has been particularly impactful. Vegetables have averaged a staggering 27% inflation rate since January 2024. The recent drop in prices has provided much-needed relief to consumers. Additionally, ongoing deflation in spices and a decrease in the inflation rates of pulses, eggs, and cereals have further contributed to the overall decline in food inflation.
Sinha emphasized that robust kharif production, coupled with good progress in rabi sowing, has improved the outlook for food inflation. This positive trend in agricultural production is crucial for maintaining stable food prices in the coming months. As inflation pressures ease, the Reserve Bank of India has responded by cutting rates by 25 basis points for the first time in nearly five years. This decision reflects a shift in monetary policy aimed at fostering economic growth amid declining inflation.
Industrial Output Growth Slows
While retail inflation has eased, the industrial output growth has shown signs of slowing down. The index of industrial production (IIP) growth fell to 3.2% in December, down from a revised 5% expansion in November. The manufacturing sector, in particular, experienced a slowdown, with growth dropping to 3% in December compared to 4.6% in the same month of the previous year.
Aditi Nayar, chief economist at ICRA, noted that the slowdown in IIP growth was sharper than anticipated, primarily driven by the manufacturing sector. Despite this, there was a sequential uptick in electricity and mining output. The trends in industrial production reveal a mixed picture, with improvements in primary, capital, and intermediate goods, while infrastructure, construction goods, and consumer durables and non-durables saw a decline.
This slowdown in industrial output raises concerns about the overall economic recovery. Policymakers will need to monitor these trends closely to ensure that the economy remains on a stable growth path. As inflation eases, the focus will likely shift to stimulating industrial growth and addressing the challenges faced by the manufacturing sector.
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