IIP: Industrial Production Contracts The Most In Nearly Eight Years
India’s industrial output contracted the most in nearly eight years with weakness seen across most key segments, showed government data released on Monday. The data adds to fears that growth in the Indian economy slowed further in the second quarter of the current financial year after hitting a six-year low of 5 percent in the first quarter.
The Index of Industrial Production contracted by 4.3 percent in September 2019 over last year compared to a contraction of 1.1 percent in August. The fall in industrial output is the steepest since October 2011, shows historical data available. A Bloomberg poll of 24 economists had forecast a 2.5 percent contraction in industrial output in September.
For the April-September 2019 period, industrial output rose by 1.3 percent as against an increase of 5.2 percent in the same duration last year.
The worst may still not be over, cautioned Aditi Nayar, economist at ICRA Ratings. “The lead indicators point to a continued weakness in October 2019, which coupled with an unfavourable base effect, may well result in a further deterioration in the just-concluded month,” Nayar said.
The weakness in output was wide spread, with all three industrial sub-segments showing a contraction in output.
- Manufacturing output contracted by 3.9 percent in September as compared to a contraction of 1.2 percent in August. Seventeen of 23 manufacturing industry groups saw a contraction in output in September.
- Within the manufacturing segment, the segment of ‘motor vehicles, trailers and semi-trailers’ saw a fall of nearly 25 percent in output.
- Mining output fell 8.5 percent in September as against growth of 0.1 percent in the previous month.
- Electricity generation fell 2.6 percent compared to a contraction of 0.9 percent last month. The contraction in electricity generation, often seen as an indicator of broader economic activity, was also the steepest in the current series.
This is first time after November 2012 that all three broad based sectors have contracted and lowest monthly growth in the 2011-12 base year series...On a quarterly basis, Q2 FY20 IIP contracted 0.4 percent, lowest quarterly in 2011-12 base series.Devendra Kumar Pant, Chief Economist, India Ratings & Research
Industrial output, as classified by the end-use of goods, pointed to a continuing deep slump in investment activity. Output in the capital goods segment, which is driven by investment, has now fallen for the ninth straight month.
- Primary goods contracted by 5.1 percent in September as against a contraction 1.1 percent in August.
- Intermediate goods growth was constant at 7 percent in September.
- Capital goods output contracted by 20.7 percent in September as compared to a contraction of 21 percent last month.
- Infrastructure goods output contracted by 6.4 percent compared with a contraction of 4.5 percent in August.
Weak Consumer Output
Production of consumer durables and consumer non-durables contracted in September, even though this was a month leading into the festive season.
- Consumer durables contracted by 9.9 percent compared with a contraction of 9.1 percent last month.
- Consumer non-durables output contracted by 0.4 percent compared with a growth of 4.1 percent last month. The last time a contraction in consumer durables output was reported was in November 2018.
The sequential worsening in the performance of consumer durables and consumer non-durables belies any hopes of a pre-festive restocking of inventories, said Nayar.
Implications For Broader Economic Growth
While weakening industrial output adds to a long list of subdued economic indicators, economists are cautious about drawing a direct correlation between the index of industrial production and broader economic growth.
“Gross Value Added and IIP measures two different data points and industrial GVA growth has generally been in excess of IIP growth. However, in Q2 FY20, industrial GVA growth is likely to be lower than 2.7 percent achieved in Q1 FY20,” said Pant of India Ratings. GDP data for the second quarter of the current financial year is due at the end of November.
Most economists see growth falling below the 5 percent seen in the first quarter. “With incoming data pointing to continued weakness in the real sector, and GDP growth likely to slip in Q2 FY20 from the multi-year low in Q1 FY20, the likelihood of another rate cut in December 2019 has intensified, despite elevated CPI inflation,” Nayar of ICRA said.