Here's another sign that economic growth is gathering pace

Industrial output picked up in April 2015 and so did inflation measured by the consumer price index (CPI) in May 2015. But, there is no direct correlation between the rise of the two indices, nor is there much reason to worry about a sharp rise in inflation. The two set of data does not give the Reserve Bank of India any reason to announce another cut in interest rates in the near term either.

The 5 per cent rise in CPI in May 2015, from a year ago, was largely led by higher prices for certain food items, specifically pulses, and higher energy costs. Prices of pulses rose nearly 17 per cent in May, ahead of an anticipated shortfall in production caused by sub-par monsoon. Food prices may turn volatile in the coming months if monsoons fail and if government does not display urgency in dealing with food shortages caused by poor rain and hoarding. For the moment, those concerns may be misplaced, as the government looks vigilant and ready to import food items to curb any sharp increase in prices.

The unexpected 4.1 per cent increase in industrial output, measured by the Index of Industrial Production, was led by an acceleration in the output of capital goods, notably machinery and equipment, as well as electric machinery, data published by the Central Statistics Office show. The manufacturing sector output, a component of the IIP, rose 5.1 per cent in April. This augurs well for the economy, as it reflects an improvement in business sentiment. The same cannot be said about consumer sentiment as yet; output of consumer goods remains muted.

Industry bodies have been quick to point out that this unexpected increase in manufacturing output, particularly capital goods, illustrated a recovery in growth, and that it can be sustained with accommodative monetary policy. The pick-up in manufacturing sector output is also consistent the increase in collection of indirect taxes. Chief economic adviser Arvind Subramaniam had suggested that a rise in indirect tax collection for the first two months of the current fiscal indicated that industrial recovery was underway. Yet, some caution is advised - the IIP data undergoes massive revisions as more data is collected in the successive months.

For the moment, inflation remains well within the RBI's target of 6 per cent for the remaining part of the year. RBI governor Raghuram Rajan had, however, cautioned that there were three risks to inflation in the monetary policy statement of June 2. These came from under-performance of monsoon, volatile petroleum prices and uncertain external environment. Further easing of interest rate would depend on the performance of monsoon and government's action on food production and price management, he had stated. Yet, industry is expected to continue to demand more monetary easing from the Reserve Bank of India. Their hope lies with the commercial banks - lending rates have declined only marginally even though the RBI has cut interest rates by about 0.75 per cent in five months.