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
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.