New Delhi: India’s factory output contracted for the first time in 26 months in August with both manufacturing and electricity output slipping into negative territory, signalling a further deepening of the broad based economic downturn.

The performance—the worst in nearly seven years—may pave the way for a further round of interest rate cuts by the Reserve Bank of India in December and force the government to announce more measures to support growth.

Data for the index of industrial production (IIP) released by the statistics department showed 15 out of the 23 industry groups in the manufacturing sector displaying negative growth in August, led by motor vehicles, trailers and semi-trailers (-23.1%), and machinery and equipment (-21.7%).

Manufacturing and electricity output contracted 1.2% and 0.9% respectively while mining output remained almost flat, growing at 0.1%. Among the use-based industries, capital goods shrank for the eighth consecutive month by 21%, signalling continuing lack of investment demand, while consumer durables contracted for the third time in a row, by 9.1%, indicating consumer sentiment remains downbeat. However, consumer non-durables and primary goods continued to register positive growth, growing at 4.1% and 1.1% respectively.

After recording double-digit expansion for three consecutive months, the pace of growth of intermediate goods such as cotton yarn, plywood and steel pipes halved to 7%, standing out as the biggest contributor to the sequential slippage in IIP growth in August.

The Indian economy is battling a severe demand slowdown and a liquidity crunch, which together resulted in the GDP growth rate falling to a six-year low of 5% in the June quarter, and growth in private consumption expenditure slumping to an 18-quarter low of 3.1%.

View Full Image The Indian economy is battling a severe demand slowdown and a liquidity crunch

The International Monetary Fund’s new managing director Kristalina Georgieva on Wednesday warned that the global economy is witnessing a “synchronized slowdown" whose effect is “more pronounced" in emerging markets like India, indicating that the multilateral agency may revise downward its growth forecast for India in its biannual World Economic Outlook to be issued on Tuesday.

Moody’s Investors Service on Thursday lowered its 2019-20 growth forecast for India to 5.8% from 6.2% earlier—the lowest so far by a major forecasting agency—holding that the economy was experiencing a pronounced slowdown partly due to long-lasting factors.

Madan Sabnavis, chief economist at CARE Ratings said negative growth in consumer durable goods is a concern and the September-December period will hold the clue for a reversal. “E-commerce sales reported in October do sound promising but it needs to be seen if this would have been at the expense of traditional sales from physical shops," he added.

Aditi Nayar, principal economist at Icra Ratings, said the worsening performance of Coal India Ltd and electricity generation, and the continuing deep contraction in auto production in September could mean that the decline in the IIP is unlikely to be reversed in September.

“There is a growing likelihood that the GDP growth may not meaningfully accelerate in September quarter of FY20, despite a favourable base effect. The extent of pickup in consumption in the festive months and crop production in the rabi season will signal whether a material turnaround in demand and economic growth is in the offing," she added.

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