NEW DELHI (Commodity Online):Adding to pressure of soaring food prices, the widening output gap between overall industrial production and six core infrastructure industries may firm up inflation further to double digits with prices of key industrial inputs like cement, steel and coal seen hardening due to demand-supply mismatch, according to an Associated Chamber of Commerce and Industry (ASSOCHAM) Eco Pulse Study.

In line with RBI’s apprehension about spillover of inflation from food products to other sectors, ASSOCHAM Eco Pulse (AEP) Study titled "Structural Analysis of Industrial Growth & Inflation" revealed that against an average double digit growth (10.6 per cent) in the overall industrial production, the six core infrastructure industries grew by less than half (5 per cent) during the August – November period of fiscal 2009-10.

There is an urgent need for the government to improve agriculture supply chain to prevent the food inflation seeping in the core inflation substantially, pointed out the Chamber.

The six core infrastructure industries including finished steel, cement, coal, crude oil, petroleum refinery products and electricity generation have a combined weight of nearly 27 per cent in the overall industrial production.

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“There is a widespread gap between the overall industrial production and the output of core infrastructure industries; which is expanding at a threatening pace. With aggregate demand going strong, there would be substantial pressure on prices due to supply side constraints” says the ASSOCHAM Study.

A stark difference of 5.6 percentage points between the growth rates of IIP and six core infrastructure industries for August – November period owes to the subdued performance of the latter. Although the growth of six core infrastructure sector improved to 6 per cent for December 2009, the better performance was primarily due to the base effect.

Ignoring the demand-supply balance, the dismal growth in production of key industrial inputs like finished steel, cement, crude oil and coal has raised concerns over the price stability of their end products.

Assessing the demand side factors the Study added, Indian cement prices are expected to firm up as demand from state projects and housing sector activity picks up significantly while steel prices would rise on account of increased demand from the auto and construction sector.

Domestic price for coal would go up as increasingly growing demand for power generation is expected to create an acute shortage of coal in the country whereas crude oil prices are likely to harden with demand for fuel going strong.

The Study also cautioned that there are underlying threats in meeting our domestic demand by heavily relying on international markets. The global resurgence in commodity prices like crude oil, coal, steel and cement is bound to shoot inflation going forward. As we import more than 70 per cent of our coking coal and crude oil demand, a turnaround in prices of these commodities does not augurs well for the Indian economy.

As per Study findings, the overall industrial production, indicated by the IIP, recorded an average rise of 5.9 percentage points between the April – July and August – November period (from 4.7 per cent to 10.6 per cent) as against an average increase of a trivial 0.9 per cent in case of six core infrastructure sector (from 4.1 per cent to 5 per cent) between the same period. This nearly stagnant growth in core infrastructure industries is likely to aggravate supply side pressure on prices of manufactured products as industrial inputs like cement, steel, coal, crude oil and electricity forms strong linkages with the overall industrial activity.

The pickup in inflation for these industrial inputs would take the already year high level of Wholesale Price Index based inflation to double digits.

The growth rates for domestic production of coal, cement and crude oil witnessed an average decline of 5.1 percentage points, 3 percentage points and 0.7 percentage points respectively between the August – November and April – July period of FY 2009-10 whereas the growth rates of finished steel and electricity generation increased marginally by 1.5 percentage points and 0.6 percentage points respectively.

Despite the rapid strides of improvement in overall industrial production since August 2009, the above trend for the core infrastructure sector confirms supply side pressure due to the robust build up on the demand side.

At a time when inflation rate is climbing up every month mainly due to spiraling food prices, the firming up of inflation in key industrial inputs would play havoc for a broad based economic recovery, concluded the Study.

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