Downward spiral: Industrial output shrinks by 1.1%; at nearly 7-year low

Industrial output crashed to an 81-month low in August, reducing by 1.1 per cent after a contraction in manufacturing output and a deepening slowdown in capital goods production pulled down growth.

Falling by the highest margin since November 2012, the index of industrial production (IIP) is now expected to remain muted this fiscal year. 

“The IIP is likely to show an erratic, low-growth trend. The policy measures announced by the government after the first quarter GDP growth of 5 per cent are more of a supply-side intervention and unlikely to boost demand,” said Devendra Kumar Pant, chief economist at India Ratings & Research.

The manufacturing sector, which accounts for 78 per cent of the index, saw output turn negative for the first time this fiscal year.
Output fell 1.2 per cent in August after a rise of 4.6 per cent in July, showed the data released on Friday.

In July, it had risen by 4.6 per cent. Back then, economists had cautioned against interpreting the data as a revival of industrial production.

Troubled manufacturing

The capital goods segment, a crucial sector that signifies investment, contracted 21 per cent. Contraction was 7 per cent in the previous month. Production in the category remained in the red for the seventh straight month. 
“This connotes less demand for investment as well as stress in the financial sector. NBFC (non-banking financial company) liquidity has affected the supply of credit because banks have not been too willing to lend at the margin for large projects,” said Madan Sabnavis, chief economist, CARE Ratings.

Of the 23 sub-sectors within manufacturing, 15 recorded a year-on-year contraction. The IIP database showed a contraction in the automobile sector intensifying as production went down by 23 per cent in August while machinery production dipped by 21 per cent. Apparel, wood products, and basic metals continued to see healthy growth in August while paper and fabricated metal products were the biggest losers.

The production of electronic goods also turned negative, contracting by 3 per cent in August. This came after the government pushed manufacturing in the sector in a sustained manner over the past one year, through a series of benefits and a phased manufacturing programme aimed at reducing imports of electronics goods.

Consumer durables also contracted, posting a decline of 9.1 per cent after going down by 2.69 per cent in July. Consumer goods production had been slowing for some time, reflecting inventories that have built up in the third quarter of 2018-19, when capacity utilisation also improved. But, with demand tapering off, production has slowed, economists had pointed out. “Ecommerce sales reported in October do sound promising but it needs to be seen if this would have been at the expense of traditional sales from physical shops,” Sabnavis added.

Broadbased decline

Heavy rain in August is likely to have dampened construction activity in various states, contributing to the contraction in the output of infrastructure/construction goods, which went down by 4.5 per cent, after growing 3.5 per cent in July. This affected mining, which saw minimal growth at just 0.1 per cent against an expansion of 4.9 per cent in the previous month.

Electricity generation fell 0.9 per cent against a rise of 4.8 per cent in July. 

“With the worsening in the performance of Coal India Ltd and electricity generation, and the continuing deep contraction in auto production in September 2019, it appears unlikely that the YoY decline in the IIP in August will be reversed in September,” said Aditi Nayar, principal economist, ICRA.

It is likely that GDP growth may not meaningfully accelerate in the second quarter of FY20, despite a favourable base effect, she said.

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