Economists point to GST’s role in August retail inflation rise

Retail inflation reached its five-month high of 3.36 per cent in August due to costlier vegetables and fruits dampening chances of a rate cut by the Reserve Bank of India (RBI) in a policy review next month. But it still remains under the comfort zone of below 4 per cent.

Economists said the increase in prices is in line with expectations, with the new indirect tax regime also being a reason for part increase in inflation.

“August CPI (consumer price index) was in line with our expectations at 3.4 per cent YoY, driven by the usual suspect, i.e. food pressures, along with higher housing and transport inflation.

On sequential basis, such vegetables-driven up trend usually dissipates towards October-November and we expect this to pan out this year as well,” said Radhika Rao, India economist, DBS Bank. The August inflation number is the highest since March 2017 when it was recorded at 3.89 per cent.

Daily consumables like fruits and vegetables turned costlier during the month with inflation print coming at 5.29 per cent and 6.16 per cent respectively as against 2.83 per cent and (-) 3.57 per cent in July, according to the data released by the Central Statistics Office (CSO).  

Close on the heels of a weak GDP in the first quarter reaching its 3-year low, factory output has grown at a mere 1.2 per cent in July compared with 4.5 per cent in the same month last year.

The sluggish pace puts pressure on RBI to reduce interest rate further in the next monetary policy review.

The weak industrial production reflects stagnancy in manufacturing activities. The manufacturing sector growth sharply decelerated to 0.1 per cent in July compared to 5.3 per cent in the same period of 2016.

“The big ticket manufacturing sector has continued to under-perform barely registering growth in July. Investment demand remains weak as capital goods production continued to contract while consumer dur­ables also contracted,” said Richa Gupta, senior economist at Deloitte.

Factory output measured in terms of index of industrial production (IIP) had declined by 0.2 per cent in June, according to revised estimates released by CSO on Tuesday. During April-July period, IIP grew by 1.7 per cent, down from 6.5 per cent in the same period last year.