IIP: India’s Industrial Output Contracts The Most Since 2012

India’s industrial output contracted in August due to weakness in the manufacturing and electricity sectors.

The Index of Industrial Production fell by 1.1 percent in August 2019 over a year ago, compared to an increase of 4.3 percent in July. A Bloomberg poll of 31 economists had forecast IIP growth at 1.7 percent.

The fall is the steepest in the last 81 months, said Devendra Kumar Pant, chief economist at India Ratings and Research.

The contraction in IIP in August defied expectations that industrial output would pick-up ahead of the festive season.

“It appears pre-stocking due to festive demand in September and October has not taken place. Going forward, the IIP is likely to show erratic, low growth trend,” said Pant. He added that the policy measures announced by the government recently are supply side interventions and unlikely to boost demand. “With no fiscal space available to the government, it is unlikely that the demand in going to return back soon,” Pant added.

Sectoral Trends

The manufacturing sector continued to contribute to weakness in industrial output. Fifteen of the 23 manufacturing industry groups showed negative growth, leading to an overall contraction.

• Manufacturing output contracted by 1.2 percent in August compared to 4.2 percent growth in the previous month.
• Mining output was at 0.1 percent in August against 4.9 percent last month.
• Electricity generation contracted by 0.9 percent compared to 4.8 percent in July 2019.

Within manufacturing, the motor vehicles, trailers and semi-trailers’ segment saw a contraction of 23.1 percent, while machinery and equipment contracted 10 percent. Manufacturing segments that beat the slowdown included basic metals, wood products and wearing apparel.

Use-Based Classification

When divided by use-based classification, capital good and consumer durables contributed most to the weakness. Capital goods data is often volatile due to lumpy orders.

• Capital goods output contracted by 21 percent in August against a contraction of 7.1 percent in the previous month.
• Primary goods output grew 1.1 percent in August compared with 3.5 percent in July.
• Intermediate goods output growth grew by 7 percent compared with 13.9 percent in July.
• Infrastructure and construction goods output fell 4.5 percent compared with a 2.1 percent rise in July.
• Consumer durables output contracted by 9.1 percent compared to a contraction of 2.7 percent in July.
• Growth in consumer non-durables output stood at 4.1 percent against a growth of 8.3 percent in the previous month.

The weakness in capital goods output is a reflection of subdued investment activity, said Aditi Nayar, economist at ICRA.

“Notwithstanding an unfavourable base effect and the disproportionate impact of the weakness in a few segments of machinery and equipment, the sharp 21 percent contraction in capital goods output in August 2019 highlights the weakness in investment activity,” Nayar said.