Auto components, commercial vehicles, and two-wheelers were flagged by the government as sectors pulling the overall IIP growth down. Machinery production reduced 18.1 per cent, same as last month. However, the production of electronic goods sustained the biggest hit, going down by 31 per cent in October, up from a 10.6 per cent fall in September. 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.
Most importantly, the capital goods segment, which signifies investment, contracted 21 per cent in October, after similar levels of fall in the previous two months. Production in the category remained in the red for the ninth-straight month despite government efforts to open up even more sectors to easier foreign direct investment (FDI) flows earlier this year. With heavy rainfall affecting the pace of construction, infrastructure/construction goods recorded an unsurprising deep 9.2 per cent contraction in October.
September’s industrial production also showed that consumer demand continues to remain in the doldrums. October, the month when the festive season kicks in, saw production of consumer durables contract for a fifth consecutive month. Production contracted by 18 per cent, up from 10 per cent in the previous month. The negative growth baffled economists who said e-commerce sales in October were very high and should have been on the back of positive growth in this segment.
Crucially, the consumer non-durables category continued to be in the contractionary zone for the second month, with production thinning by 1.1 per cent, after a 0.4 per cent in the previous month.
“While the sharp contraction in capital goods and consumer durables appears alarming, it comes on an extremely high base of October 2018. In our view, we should await the data for November 2019, to get a clearer sense of how these two categories are likely to perform in Q3FY20,” said Aditi Nayar, principal economist at ICRA.
With the output of the core sectors falling by a record 5.8 per cent in October to an at least 14-year low, and production by seven of the eight industries declining, slow economic growth is expected by economists in the second quarter of this fiscal year.
Experts predicted that GDP growth is likely to slip in the second quarter of FY20 from the already multi-year low in the first quarter. As a result, the pressure on the RBI to go for another rate cut will increase, despite elevated CPI inflation, they said.