The Indian economy was showing signs of recovery after gross domestic product (GDP) growth plummeted to a 26-quarter low of 4.5% in the three months ended September 2019. Various high-frequency indicators (data released more often than a quarter) such as the Purchasing Managers’ Index (PMI) continue to suggest this. The Composite PMI index was 56.3 in January 2020, the highest since June 2018, indicating rise in economic activity in manufacturing and services.
On Tuesday, finance minister Nirmala Sitharaman said in Parliament that “green shoots” were visible. “There are seven important indicators which show that there are green shoots in the economy… economy is not in trouble,” she said while replying to a debate on the Union budget in Lok Sabha.
Two data points released by the National Statistical Office (NSO) on Wednesday are bound to dampen such hopes.
One, retail inflation, measured by the Consumer Price Index (CPI), increased further from a 65-month high of 7.35% in December 2019 to 7.59% in January. This was expected.
Two, industry growth, as measured by the Index of Industrial Production (IIP), slipped into contraction mode in December 2019. It declined by 0.3% in December on an annual basis.
Both these numbers are more adverse than what analysts had expected. A Reuters poll of economists estimated the CPI to quicken 7.4% in January and another Reuters poll of analysts projected IIP growth in December to rise by 1.8% . The increase in inflation comes despite some moderation in onion and vegetable prices, the result of a seasonal shock, as untimely rains destroyed a lot of the summer crop. To be sure, vegetable inflation still continues to be high. Onion inflation came down to 247% in January 2020 compared to 327% in December 2019. For vegetables, this figure has come down to 50.2% from 60.5% . In fact, the entire moderation in food inflation—it has come down from 14.2% in December 2019 to 13.6% in January 2020—is due to vegetable prices, as all other food groups have seen an increase in inflation in January compared to December. The increase in the headline inflation rate in January is primarily on account of fuel and lighting, clothing and footwear and miscellaneous sub-groups.
See Chart 1: Sub-group wise growth in inflation 
The contraction in IIP growth is mainly because of poor performance in manufacturing, which has a weight of 77.6% in the index. The manufacturing component of IIP contracted by 1.2% on an annual basis in December 2019 after growing 2.7% in November. A further disaggregation of manufacturing data shows that consumer goods, both durable and non-durable ,were the biggest drag on manufacturing growth in December. For example, growth in both textiles and apparel slipped into negative territory in December from positive growth in November. A usage-wise disaggregation of IIP shows that consumer goods are the only category where growth turned from positive to negative between November and December. Primary goods, on the other hand, have shown positive growth in December after contracting in November.
See Chart 2: Usage-wise growth in IIP 
The CPI and IIP data, when seen along with the results of the RBI’s latest Consumer Confidence Survey (CCS) suggests that high food inflation might have contributed to the existing squeeze on non-food consumer demand. CCS shows that whereas net perception on non-essential spending has plummeted to an all-time low (the data is available from September 2015), the share of respondents who see their essential spending increasing was the highest since June 2018.
“RBI’s accommodative policy stance and room for further accommodation rests on inflation dropping like a stone in the coming months. The probability of such an outcome has become challenging now”, Prithviraj Srinivas, chief economist, Axis Capital, told Reuters.
“Persistence of high food inflation is because of gross mismanagement of the food economy by the government. It is sitting on record stocks of cereals and cereal inflation is increasing. Unless food inflation is brought under control; and this cannot be achieved by killing poor people’s demand, no sustainable economic recovery can be achieved”, said Himanshu, associate professor of economics at JNU.
