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Double trouble in kitchen & factory

Dec. 12: Vegetable prices have driven up retail inflation to 11.24 per cent in November, its highest level since a new gauge was developed three years ago.

The bad news was aggravated by another key economic data release: the country’s industrial production in October shrank for the first time in four months.

The Central Statistical Organisation (CSO) said industrial output in October had slumped by 1.8 per cent from a year ago, which indicated that the 2 per cent growth in the index of industrial production (IIP) in September was either a sudden blip or a data aberration that is now correcting itself. The last time the IIP shrank was in June when too it had fallen by 1.8 per cent.

The double whammy has re-ignited the inflation-versus-growth debate less than a week before the Reserve Bank of India reviews the monetary policy. The two data points will figure prominently in the review next Wednesday.

In Calcutta, RBI governor Raghuram Rajan reacted with some alarm to the new data points.

“The IIP numbers surprised on the downside; and the CPI (consumer price index) surprised on the upside. While I don’t want to comment on the basis of one number, it (retail inflation) is higher than what the market expected and what we feel comfortable with,” Rajan said.

Analysts had expected industrial output to contract but only by 1.2 per cent. The higher number now means that India’s economic recovery is a lot more fragile than the pundits had foreseen.

The manufacturing sector, which constitutes about 76 per cent of industrial production, contracted 2 per cent from a year earlier, the statistics ministry said.

Consumer inflation — perceived as a big factor in the stunning rout of the Congress in the Assembly elections —has crept up from the re-calibrated level of 10.17 per cent in October. Last month, October inflation had been estimated at 10.09 per cent.

Costlier fruits and vegetables such as onions and tomatoes have pushed retail inflation to its highest level since the CSO created the new index in January 2011. The index showed that the annual rate of inflation in vegetables was 61.6 per cent in November.

Until today, the highest year-on-year retail inflation based on the new consumer price index was 10.91 per cent in February this year.

The economic data points came out after market hours. In a skittish market, the sensex fell 245.80 points, or 1.16 per cent, to close at 20,925.61 — its lowest level since December 4.

On Tuesday, the CSO is due to come out with its estimate of inflation based on the wholesale price index (WPI), which has traditionally been the number that the RBI’s policymakers have looked at closely because of the regularity and consistency of the data that is mashed into the index.

Said Rajan: “In a situation where we have high inflation and low growth, we have to calibrate policies carefully. We have repeatedly said there are tradeoffs that we have to make based on all available data.”

In Delhi, C. Rangarajan, former RBI governor and chairman of the Prime Minister’s Economic Advisory Council, said the factory data were a disappointment but should pick up in the coming months. “There’s limited room for RBI (in the conduct of its monetary policy),” he added.

The sudden vault in retail inflation has already sparked speculation about another round of interest rate hikes, especially after finance minister P. Chidambaram and Rajan had indicated yesterday that tackling inflation would be the top priority for the central bank.

The pundits are already bracing for Rajan’s third interest rate hike since he assumed office on September 4. The new RBI governor has already raised the key policy interest rate — the repo — by 50 basis points to 7.75 per cent.

“I will not be surprised if he raises the repo rate by another 50 basis points,” said a senior official with a private bank.

But industry has been clamouring for a rate cut for a long time to kick-start the sputtering economy. Ficci president Naina Lal Kidwai said: “The current (IIP) data re-emphasises that unless interest rates are brought down, we are not going to see much improvement in the index in the near term.”

But most believe that the RBI will bring out the sledgehammer of a rate hike to subdue inflation.