Manufacturing, capital goods drag IIP in negative territory

India’s industrial output contracts by 1.9% after rising by 0.7% in September

IN OCTOBER

THE COUNTRY’S industrial output slid back to the negative territory again with a contraction of 1.9 per cent in October mainly due to sharp decline in production of capital goods and poor performance of manufacturing sector.

After showing decline for two consecutive months of July (-2.5 per cent) and August (-0.7 per cent), factory output, as measured in terms of the Index of Industrial Production (IIP), had grown at 0.7 per cent in September. Industrial growth is may be hit further in the coming months, with the Reserve Bank of India expecting the withdrawal of old Rs 500 and Rs 1,000 notes to impact industrial activity in the near term.

For the April-october period, industrial output declined by 0.3 per cent as against a growth of 4.8 per cent a year ago, as per the data released by Central Statistics Office (CSO) on Friday. Factory output grew at a higher rate of 9.9 per cent in October last year mainly driven by better performance of manufacturing sector and increase in output of capital goods by 16.5 per cent.

The manufacturing sector, which constitutes over 75 per cent of the IIP index, recorded a contraction 2.4 per cent in October. Similarly the capital goods output also shrank by 25.9 per cent. In terms of industries, 12 out of 22 groups in the manufacturing sector showed negative growth in October. The mining sector recorded a contraction of 3.1 per cent in October as against a growth of 3.5 per cent a year ago.

Power generation recorded a growth of 1.1 per cent in October compared to 5.3 per cent growth in the same month a year ago. Growth in output of consumer durable went up by just 0.2 per cent in October compared to 41.9 per cent growth a year ago.

The output of consumer non-durable goods declined by 3 per cent in October as against 4.8 per cent growth a year ago. Overall, consumer goods production dipped 1.6 per cent in October compared to 18.3 per cent growth a year ago. As per ‘use-based’ classification, the growth rates in October 2016 over October 2015 are 4.1 per cent in basic goods, (-) 25.9 per cent in capital goods and 2.9 per cent in intermediate goods.

Industrial output may shrink further in the coming months as the impact of the withdrawal of legal tender status of high denomination notes takes effect, with individual postponing purchases and companies delaying cutting down on production. Indicating lackluster activity in the economy, 12 out of 22 industry groups in the manufacturing sector reported negative growth during the month of October as compared to corresponding month of the last year. The downward spiral have been already been witnessed in the auto sector with sales declining sharply.

According to the Reserve Bank of India, the withdrawal of specified bank notes could impact industrial activity in the near-term. The RBI also lowered its growth estimate for the year saying that gross value added (GVA) growth is likely to settle at 7.1 percent in fiscal 2017 compared to the 7.6 percent expected earlier. The central bank kept its policy rates unchanged. Analysts estimate that the government’s currency withdrawal move may reduce the Gross Domestic Product by 50-200 basis points in the current financial year.

For the April-october period, industrial output declined by 0.3 per cent as against a growth of 4.8 per cent a year ago