IIP Con­tracts in Dec as Note Ban Takes its Toll

IT HURTS Dec IIP 0.4% lower; growth for Apr-Dec at 0.3% vs 3.2% a year ago

The Economic Times - - Economy: Macro, Micro & More - Our Bureau

New Delhi: In­dus­trial pro­duc­tion con­tracted in De­cem­ber due to a sharp de­cline in pro­duc­tion of con­sumer goods, con­firm­ing a de­mon­eti­sa­tion-led con­trac­tion in de­mand.

Ac­cord­ing to the data re­leased on Fri­day, the In­dex of In­dus­trial Pro­duc­tion (IIP) was 0.4% lower in De­cem­ber from a year ago, well be­low 5.7% growth in Novem­ber and con­sen­sus ex­pec­ta­tion of around 1% in De­cem­ber. The cu­mu­la­tive IIP growth for April-De­cem­ber is 0.3% against 3.2% for the same pe­riod last year.

“The steep and broad-based dip in the per­for­mance of the IIP in De­cem­ber 2016 on a se­quen­tial ba­sis is largely along ex­pected lines, with in­ven­to­ries be­ing ad­justed to the tem­po­rary de­mand com­pres­sion af­ter the note ban, and the boost from a favourable base ef­fect fad­ing away,” said Aditi Na­yar, prin­ci­pal econ­o­mist, ICRA. The Pur­chas­ing Man­agers’ In­dex (PMI) had sug­gested sub­dued man­u­fac­tur­ing sen­ti­ment both in De­cem­ber and Jan­uary.

The de­cline is largely due to con­sumer goods-driven 2% con­trac­tion in man­u­fac­tur­ing, the largest com­po­nent of the in­dex. Elec­tric­ity gen­er­a­tion was up by 6.3%, while min­ing out­put rose 5.2%. Lack of cash seems to have dented de­mand for con­sumer goods, which spilled over to 6.8% de­cline in pro­duc­tion. Within con­sumer goods, pro­duc­tion of durable goods fell 10.3% from a year ago in De­cem­ber, while that of non-durables or the FMCG goods was down 5%. “The sec­tors where the im­pact of de­mon­eti­sa­tion was ex­pected to be more pro­nounced were con­sumer durables and non-durables,” Su­nil Sinha, prin­ci­pal econ­o­mist, In­dia Rat­ings & Re­search, said, adding that the num­bers de­flate the gov­ern­ment’s claim that “de­mon­eti­sa­tion has not been as dis­rup­tive as it has been made out to be.” Cap­i­tal goods were lower by 3% in De­cem­ber, con­firm­ing sub­dued in­vest­ment sen­ti­ment. As many as 17 out of 22 man­u­fac­tur­ing sub-sec­tors re- ported con­trac­tion in the month of De­cem­ber with of­fice, ac­count­ing and com­put­ing ma­chin­ery lead­ing with a 23.9% con­trac­tion. The data pro­vide ev­i­dence of a softer sec­ond half fol­low­ing de­mon­eti­sa­tion. The Eco­nomic Sur­vey ex­pects FY17 growth to be in the range of 6.5% to 6.75% com­pared with 7.9% in FY16. The RBI ex­pects GVA growth in the cur­rent fis­cal at 6.9% com­pared with 7% es­ti­mated by the Cen­tral Statis­tics Of­fice with­out fac­tor­ing in the im­pact of de­mon­eti­sa­tion. The cen­tral bank has said de­mon­eti­sa­tion will have a ‘tran­sient’ im­pact on the econ­omy. The RBI on Wed­nes­day de­cided not to cut rates cit­ing up­side risk to in­fla­tion, dis­ap­point­ing mar­kets that had pen­ciled in a 0.25 per­cent­age points cut.

Banks have low­ered in­ter­est rates, thanks to the surge in low-cost funds due to de­mon­eti­sa­tion, and the im­pact of lower lend­ing rates could be seen on de­mand within a few months though Jan­uary is likely to be lack­lus­tre.

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