The inflation-IIP double whammy

The week has begun on a somber note. The political developments in Delhi, with the Left exiting the UPA and the Samajwadi party making an entry, will mean some changes ahead, some of them could affect business. Then, on Friday, inflation inched ever so closer to 12%. This was not as much a surprise but a confirmation that high levels of inflation won’t go away in a hurry. Indeed, if RBI’s level of 5.5% is taken as a benchmark, we have a long way to go before we can relax.

The index of industrial production was next and it disappointed but did not surprise. The May 2008 excise collections clearly indicated a slowdown in production. Excise is a tax on production. Now, the June 2008 indirect tax numbers were released on Monday, and the trend is worrisome. On the positive side, excise collections grew by 5.9% compared to 4.4% in May. But customs duties grew by 13% compared to 20.9% in the April-June quarter. Thus, excise has improved a bit but customs has slowed down.

A slowdown in imports is a worrying sign for that indicates either a slowdown in capital investments or consumption demand. Service tax collections growth too is down, compared to the first quarter. What that seems to say is that manufacturing IIP will be a bit better but some sectors may see a slowdown, notably capital goods.

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