Has India hit the macro jackpot?
High industrial growth amidst low to moderate inflation is the ideal macro situation to have. However, that is not always practical. Normally, high growth and high inflation go hand in hand. India, like the rest of the world, faced high levels of inflation combined with moderating growth since late 2021. That is what economists call stagflation. What is material is that the Indian economy now appears to be up against a double blessing. Consumer inflation is falling rapidly and at the same time, the growth (especially manufacturing growth) is picking up. We have evidence for just about two months and a few swallows do not a summer make. What is gratifying is that despite the RBI raising rates by 250 basis points between May 2022 and February 2023, it has managed to curb inflation without hitting growth. That is what the macro double blessing is all about.
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India inches closer to 4% inflation target
The Indian consumer inflation or CPI inflation has come down sharply in the last few months. Last year in April 2022, the inflation peaked at 7.79% and has since fallen to 4.25% in May 2023. The RBI inflation target for India is 4%, so we are tantalizingly close to that. How did the inflation fall so sharply is evident from the table below.
| Month | Food Inflation (%) | Core Inflation (%) | Headline Inflation (%) |
| May-22 | 7.97% | 6.08% | 7.04% |
| Jun-22 | 7.75% | 5.96% | 7.01% |
| Jul-22 | 6.75% | 6.01% | 6.71% |
| Aug-22 | 7.62% | 5.90% | 7.00% |
| Sep-22 | 8.60% | 6.10% | 7.41% |
| Oct-22 | 7.01% | 5.90% | 6.77% |
| Nov-22 | 4.67% | 6.00% | 5.88% |
| Dec-22 | 4.19% | 6.10% | 5.72% |
| Jan-23 | 5.94% | 6.10% | 6.52% |
| Feb-23 | 5.95% | 6.10% | 6.44% |
| Mar-23 | 4.79% | 5.95% | 5.66% |
| Apr-23 | 3.84% | 5.20% | 4.70% |
| May-23 | 2.91% | 5.02% | 4.25% |
Data Source: MOSPI & Ministry of Finance Estimates
Actually, two factors have played a major role in curbing inflation in India. Firstly, the arrival of fresh food grain stocks from the Rabi harvest into the Mandis has resulted in inflation toning down sharply. The other big factor is the sharp fall in crude oil prices on a yoy basis. Compared to the levels of $120/bbl touched by Brent Crude early last year, the price of Brent Crude has fallen to $72/bbl. That has resulted in a sharp fall in energy inflation. The third component of core inflation continues to remain above 5% and that is the sticky part of the government challenge. But clearly, it has been a case of cheaper food and energy prices driving inflation lower in India.
Let us now turn to the IIP story
Unlike consumer inflation, which has come down in a steady fashion, the IIP generally tends to be bumpy and volatile. The IIP is announced with a lag of one month; which means the April IIP number gets reported in mid-June. If you look at the IIP table below, it had dipped into negative in August 2022 and October 2022, but that has changed into positive territory since November 2022. In fact, the average IIP growth over the last 6 months has been around 5%, which is an extremely impressive number at a time when the IIP was supposed to be impacted negatively by the RBI hawkishness. In the latest month, the turnaround in IIP from 1.14% to 4.24% was actually triggered by manufacturing growth.
| Month | IIP Growth (%) |
| Apr-22 | 6.66% |
| May-22 | 19.72% |
| Jun-22 | 12.62% |
| Jul-22 | 2.21% |
| Aug-22 | -0.68% |
| Sep-22 | 3.32% |
| Oct-22 | -4.07% |
| Nov-22 | 7.58% |
| Dec-22 | 4.68% |
| Jan-23 | 5.17% |
| Feb-23 | 5.56% |
| Mar-23 | 1.14% |
| Apr-23 | 4.24% |
Data Source: MOSPI
When you look at IIP, it is not just the announcements but also the revisions that give a sense of the colour of IIP growth. This time around, both revisions have been positive. For instance, the first revision for March 2023 was 61 bps higher while the final revision for January 2023 IIP was higher by 64 bps. This does raise hopes of the April IIP also being upgraded when the revisions are announced.
The real story lies in the sectoral break-up of IIP
To understand the gist of the IIP story, one needs to look at the sectoral break-up. For April 2023, mining grew 5.1% compared to 6.8% in March; Manufacturing grew 4.9% compared to just 0.5% in March and Electricity contracted -1.1% compared to contraction of -1.6% in March. Since manufacturing has the highest weightage of 77.63% in the IIP basket, the overall IIP growth tends to gravitate towards manufacturing growth. That is evident in the month of April also.
We can also look at IIP from the user industry perspective, rather than just the output perspective. Primary Goods grew by 1.9%, Capital Goods grew by 6.2%, Intermediate goods 0.8% and infrastructure by 12.8%. However, consumer durables demand contracted -3.5% while consumer non-durables expanded 10.7%. One signal that is emanating in the last few months is that the worst in terms of a slowdown in consumer demand may be over. Things should get better going ahead.
With a double blessing; will RBI cut rates?
With inflation at 4.25% (just 25 bps shy of RBI target) and manufacturing growth bouncing back, will the RBI venture to cut rates?
- RBI underlined in its policy statement that rate cuts would be justified only if inflation stayed consistently under 4%. That may be tough with delayed monsoons and the spectre of food inflation this year.
- RBI is also aggressively absorbing surplus liquidity from the system through VRRRs. Till there is surplus liquidity, the RBI is unlikely to change its stance to neutral. It will be first a change in monetary stance and then a rate cut.
- Finally, there is the global story too. RBI cannot cut rates and risk monetary divergence when other central banks are still hawkish. Also, if a global slowdown is triggered, RBI needs room to cut rates. For now, it is wait and watch!
Content Source: MOSPI
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