Good & bad news ahead of Budget: significant rise in inflation & industrial production

Ahead of the Union budget for 2018-19, there was good news for the Narendra Modi government. Index for Industrial Production (IIP) is at a 25-month high. In the month of November 2017, IIP grew by 8.4% from 2.2% in the previous month.
In a major improvement, fifteen out of the twenty three industry groups in the manufacturing sector showed positive growth in November 2017. In October, 2017 only 10 out of 23 industry groups had reported growth in October 2017.

However the news of high IIP growth was dampened by high retail inflation as measured by the Consumer Price Index (CPI) going above 5% mark. It stood at a 17-month high of 5.2% in December, 2017. The items that caused inflation to move above the 5% mark included eggs (9.48%) vegetables (29.13%) and housing (8.25%) fuel and light (7.90%).

In the coming months, rising crude oil prices, which are at a 3 year high at the moment, could pose an even bigger risk to inflation in the country. The price of Brent crude crossed $70 a barrel mark on Thursday for the first time since December 2014. In its last monetary policy review, RBI had said that “the recent increase in oil prices may have a negative impact on margins of firms and GVA (Gross Value Added) growth.
An above 5% retail inflation will ensure that there is no rate cut in the next monetary policy (February) meeting by the Reserve Bank of India. And in case, it crosses the danger mark of 6% in January, there could also be a possibility of the central bank increasing its interest rates in future. RBI has a mandate to control retail inflation in the country in the range of 4% to 6%. A situation like that could act as a deterrent for Indian economy's recovery as credit growth to the industry by banks is below 10% and new investment proposals by India Inc fell to a 13-year low of Rs 76,800 crore in the October-December quarter of 2017.

The RBI had maintained a status quo in its monetary policy review held in December 2017. Retail inflation breached the central bank's medium-term target for the second straight month in December which could intensify pressure for RBI to raise policy rates in the next few months.