IIP contracts 0.4% in Dec

India’s industrial production contracted by 0.4% in December after high-value currency notes were invalidated the previous month, data released on Friday showed.

In November, the index of industrial production (IIP) had grown 5.7% — the fastest pace in 13 months, helped by a favourable base effect.

Data released by the Central Statistics Office showed that while mining and electricity output grew 5.2% and 6.3%, respectively, in December, manufacturing contracted by 2%.

Capital goods, which is a proxy for investment demand in the economy, contracted 3% in December.

The impact of the November 8 demonetisation was clearly visible from the 5% contraction in production of consumer nondurables and a 10.3% fall in production of durables, signalling that the move had taken its toll on consumption demand in both rural and urban areas.

The 76th round of the Reserve Bank of India’s industrial outlook survey suggests that financing conditions in the manufacturing sector worsened in the October-December quarter and are expected to remain tight in the current quarter.

This is corroborated by a sharp slowdown in bank credit to industry and continuing sluggishness in the investment climate in some sectors.

The RBI, which kept its policy rates unchanged on Wednesday, said growth is expected to recover sharply in 2017-18 as discretionary consumer demand held back by demonetisation bounces back, beginning in the closing months of 2016-17.

Lower interest rate due to better transmission of past policy rate cuts, increase in capital expenditure and a boost to the rural economy will ultimately revive consumption and investment demand, the central bank said.