These Industries Are A Drag On India’s Industrial Production
IIP continues to indicate weakness in India's manufacturing sector.
The one indicator that belies signs of a recovery in the Indian economy is the Index of Industrial Production.
While factory output rose annually in February, it fell over the previous month. For April 2021-February 2022, the index averaged at 129.97 against 130.1 in the corresponding pre-pandemic period of FY20.
Among manufacturing industries that carry a significant weight in the index, coke and refined petroleum products, motor vehicles and other transport equipment, fabricated metal products and electrical equipment have seen the sharpest contraction in the 11 months to February over the same period in FY20.
While the index for manufacturing of motor vehicles, trailers and semi-trailers expanded for the third straight month, that of coke and refined petroleum products rose for four months in a row before a spike in crude led to a drop in February.
Signs Of Slow Decline
The indices for manufacturing of other transport equipment, computers, electronics, electrical equipment, machinery and fabricated metals indicate continuing weakness.
Manufacturing of chemicals, pharmaceuticals, rubber and plastic products expanded in the 11 months to February over the corresponding pre-pandemic period but is now losing steam.
Global geopolitical risks, quickening price pressures and shortages of key inputs are some of the challenges faced by the manufacturing sector, Tushar Shah, co-chief executive officer at CareEdge Research, said. Sectors such as chemicals, fabricated metal products, rubber, machinery and electrical equipment marked annual contraction in industrial output in February due to the ongoing geopolitical tension, he said.
Manufacture Of Chemicals And Chemicals Products
The chemicals sector has been severely impacted by supply-chain disruptions, leading to elevated prices over the last year, Hetal Gandhi, director at Crisil Research, said. The Russia-Ukraine crisis has pushed crude oil prices to multi-year highs, leading to a hike in chemicals prices, affecting the overall demand. “With such high volatility levels witnessed over the last few months, we have noticed majority of the customers to have adopted the wait and watch stance, thus deferring the demand.”
Manufacturing Of Fabricated Metal Products
The recent geopolitical tension has led to demand-supply gap created by disruptions in metal production of Russia and Ukraine, Shah said, adding this will lead to a rise in input costs.
According to Gandhi, while the production of base metals witnessed growth, manufacturing of fabricated metal products fell due to weak demand from construction segment as well as slowdown in auto production.
Machinery And Equipment Segment
The ongoing geopolitical tension-led issues like an increase in crude oil prices and supply disruption for metals and defence equipment are expected to hamper the Indian machinery and equipment segment, Shah said.
Electrical Equipment
The segment has been mainly impacted by supply-chain disruptions, coupled with deferred demand, according to Gandhi. A Covid resurgence in China has impacted supply of components sharply over December to March period. This is coupled with increasing commodity prices where key metals have seen a price surge, she said.
Both combined have either led to a shortage of key inputs or price escalations, causing deferment of customer orders. From a power equipment perspective specifically, weak financial position of state entities has led to order postponement as they await implementation of the new reform package, Gandhi said.
Transport Equipment And Pharmaceuticals
The automobile industry has been grappling with supply constraints as semiconductor shortage has impacted vehicle production, an April 19 note by ICRA Ltd. said. The passenger vehicle segment was affected the most as demand was healthy and exceeded supply, it said. Semiconductor availability, however, has been improving over the past few months, it said.
According to Shah, manufacturing of rubber and plastic products took a hit amid high input costs due to skyrocketing increase in crude oil prices.
Deepak Jotwani, assistant vice-president and sector head for corporate ratings at ICRA, said pharmaceuticals manufacturing industries have done well and a moderation is likely because of a strong base effect. But a rise in raw material prices because of supply-side disruptions from China and global supply-side issues, along with an increase in crude prices and freight costs are pain points for pharmaceuticals manufacturers, he said.
