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Present IIP numbers a source of worry amid push to Make in India plans: DK Joshi, Crisil

IIP was expected to come lower but the levels that we have finally got a 1.74 is very disappointing. Particularly because this is a new IIP series, said Mythili Bhusnurmath.

ET Now|
Updated: Jul 13, 2017, 01.18 PM IST
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Inflation has undershot. Typically we worry about inflation overshooting the band, it is right now below the 2-6% band that RBI has around 4%, said DK Joshi.
Inflation has undershot. Typically we worry about inflation overshooting the band, it is right now below the 2-6% band that RBI has around 4%, said DK Joshi.
Mythili Bhusnurmath, Consulting Editor, ET Now and DK Joshi from CRISIL discussed the current IIP numbers and ruled out possibility of more than one rate cut. Edited excerpt:

How do you read into these numbers your initial thoughts on the macro prints that we have received?
Mythili Bhusnurmath: Yes, the macroeconomic numbers that have come today both for IIP as well as the consumer price inflation, are both exceedingly disappointing. Both in the low numbers, IIP was expected to come lower but the levels that we have finally got a 1.74 is very disappointing. Particularly because remember this is a new IIP series which by and large has been showing a healthier number than in the earlier series. So this is exceedingly disappointing, of course, in both cases the fact is that there was a high base effect the previous year this time both IIP as well as CPI were much higher so that would have had some impact, but clearly GST has also had an impact and one was only hope that this is part of the short-term pain and eventually we will find a long-term gain.

It seems like with the inflation numbers having eased the clamour for a rate cut is growing now. The June inflation has hit a new low 1.54% you have the IIP numbers slowing to the lowest rate in November?
DK Joshi: True. The probability of a rate cut has definitely increased, it is not that the risk to inflation has completely disappeared. I think there are some in the offing in the sense that you have the HRA vision that has been cleared and typically pushes inflation up. Also, the GST typically is mildly inflationary in the short run and that is what we expect it to be neutral to a little bit inflationary. Now the issue is will these be offset by the current trend or lower inflation rate and our sense is yes it will be and that is why we expect 4% average inflation in 2017-2018 and this does open a window for another rate cut and my sense is that we are likely to get a rate cut in the August policy.

A rate cut or a few rate cuts?
DK Joshi: Few rate cuts. I would be cautious but one rate cut - you have to keep looking at how the data evolves. I think one rate cut looks like is definitely in the offing now.

You look at how the data evolve, you are essentially talking about India or you are looking at overseas cues. Because in India given our macro conditions and I would imagine that as RBI is also indicating there could be two rates cuts in the offing, but would you want to be in easing mode at a time when the ECB is also indicated that they are going to withdraw QE and tighten policy?
DK Joshi: Well, that is an open question and the US also is uncertain whether they will go in for another rate cut. It is all going to be data driven. And Indian monetary policy is largely influenced by what happens in the domestic economy, not on the basis of what happens, I am not saying global factors do not matter, in the connected world they do matter, but domestic conditions will dictate the policy more than the global cues. In any case, the moves from the ECB or from the US will be very-very slow. There is no sudden action expected from there and we have seen that despite the US tightening its policy, the capital inflows to India have been rising and actually rupee has been appreciating. I would not bother too much about what is happening there at this juncture and there are too many risks floating around also in the advance countries, so the policy actions there will be more gradual. Here one rate cut as I said is quite likely. Beyond that it is difficult to see, I mean this inflation rate, one should recognise, is unusually and exceptionally lower, I mean it is not going to continue like this.

Let us get in your views and cannot help but dwell on the kind of IIP and CPI data that we got yesterday and just from a broad perspective between IIP and between CPI, what worries you more?
Mythili Bhusnurmath: Between the CPI and the IIP, I would certainly be more concerned and worried about the IIP. Because remember in the CPI we were trying to bring it down and of course, we have kind of overshot, we have gone much below what we really wanted it to be. Remember the RBI’s target is 4% plus minus 2% so the figure of 1.5 is much below what the RBI itself would want. But unlike that in the case of the IIP, it has been a steady downward trend with marginal improvement one off month there has been some improvement but for the past two or three years, we have seen IIP at very discouraging numbers, more worrisomely capital goods, consumer durables, all the numbers that would suggest investment is taking place, does not seem to be happening. Clearly, there is still excess capacity, corporates are not willing to invest so between the two I would be far more worried about the fact that IIP just refuses to budge from those very low levels.

Dr Joshi, how are you going to be looking at that data? I mean are you more concerned about growth because inflation seems to be easing now one would not want too soft an inflation trend but even so at this point in time it is really a tossup between price levels versus growth?
DK Joshi: Inflation has undershot. Typically we worry about inflation overshooting the band, it is right now below the 2-6% band that RBI has around 4%. I would agree with Mythili that the IIP is more of a worry because the industrial production has been very weak as measured from the IIP, though GDP data shows a completely different picture. There the manufacturing growth is quite high and the difference is that we have moved from an establishment to an enterprise approach in national accounts and that means that manufacturing measured in the GDP also includes services used in manufacturing and also it is a much broader definition. Probably the services part of manufacturing is rising much faster and that is getting reflected in the GDP. But yes, coming to the pure manufacturing which is reflected in IIP, that continues to trail and it is a source of worry and particularly given that we have plans to bring manufacturing back into action through Make in India. As of now, there are little signs from the data that that is happening.

Also Read

IIP base, methodology review in the works

Seven-year hitch: IIP contracts 1.1% in August

CPI, IIP prints improve hopes of a better H2

Rising inflation, slow IIP growth raise rate cut hopes

ET View: September IIP - Lacklustre capital goods output keeps overall index low

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