Industrial Output Contracts 0.4% In December As Demonetisation Hits Manufacturing
Seventeen out of twenty two industry groups in the manufacturing sector showed negative growth in December
Industrial output fell in the month of December due to weakness in manufacturing activity, showed data released by the government. Output of items, for which payments are made in cash, showed a decline suggesting that the currency crunch impacted buying and manufacturing activity.
The Index of Industrial Production (IIP) declined 0.4 percent in December compared to a year ago, showed the data. A poll of analysts conducted by Bloomberg had forecast a 1.2 percent growth in IIP. The decline in output in December follows a 5.7 percent growth in the index in November.
For the April-December period, industrial output has expanded a meager 0.3 percent compared to 3.2 percent in the same period last year.
The manufacturing sector registered a decline of 2 percent in output, while the mining and electricity sectors saw output rise by 5.2 percent and 6.3 percent respectively. Seventeen out of the twenty two industry groups in the manufacturing sector showed negative growth during the month of December 2016.
Segments that contributed meaningfully to the decline included commercial vehicles, gems and jewellery, motorcycles and cement. This was likely due to the shortage of cash in the economy which was at its peak in the month of the December. The government had withdrawn notes of Rs 500 and Rs 1000 on November 8 and asked citizens to deposit all old currency in banks and post offices by the end of December. The availability of new currency during this period was thin and cash purchases were badly impacted.
Categories that saw a sharp drop in output included:
- Wollen carpets where output fell 51.3 percent
- Three-Wheelers where output fell 43 percent
- Scooters and Mopeds where output fell 26 percent
- Motorcycles where output fell 24 percent
- Rice where output fell 32.8 percent
The break-up by use based classification showed that capital goods production declined 2.8 percent compared to 15 percent growth in November.
Consumer durables production fell sharply by 10.3% while output in the consumer non-durables segment fell 5 percent.
The drop in industrial output in December tallies with the decline reported in the manufacturing purchasing managers’ index (PMI), which had shown a contraction for the month. The PMI for January, however, rebounded into positive territory, suggesting that industrial output could rebound as well.
December IIP growth at (-)0.4 percent was largely led by capital goods production and consumer goods production decline. Manufactured goods registered across-the-board contraction in production. This was largely implied in the automobile production levels in December. The situation is likely to have improved since then and IIP growth should see some uptick in January.Kotak Institutional Research
Growth in the Indian economy is seen settling at 6.9 percent in fiscal 2017, according to estimates put out by the Reserve Bank of India on Wednesday. The central bank, however, expects the economy to rebound next fiscal and clock growth of close to 7.4 percent.