New Delhi: Factory output contracted for the third month in a row in January, driven by a sharp decline in production of capital goods and consumables, signalling that growth momentum in the economy remains vulnerable.

During the month, the Index of Industrial Production (IIP) shrank 1.5%, against a 1.2% contraction the previous month and a 3.2% contraction in November.

While the contraction in output in November was attributed to fewer working days due to Diwali, the persistence of this trend the following month baffled most economists, with some proffering the floods in parts of southern India in November and December as a reason.

Aditi Nayar, senior economist at rating agency Icra Ltd, said even though there was no appreciable improvement in the export segment and rural demand, the weakening of the performance of the manufacturing sector in January as compared with December came as a surprise.

“The volume-based trend for the manufacturing sector continues to differ sharply from the high growth in value addition that was revealed by the GDP (gross domestic product) data for the third quarter of 2015-16, released in February 2016. A persistence of this trend may weigh upon IIP expansion in the remainder of the current fiscal," she added.

The Central Statistics Office (CSO) has estimated that value-added manufacturing will grow 9.5% in 2015-16. However, during the April-January period, manufacturing output grew 2.5%, according to the IIP data.

In January, mining and electricity sectors grew 1.2% and 6.6%, respectively, while the manufacturing sector with a 75.5% weightage in IIP contracted 2.8%.

The Reserve Bank of India, in its monetary policy review on 2 February, said the near-term outlook for industrial activity may be constrained by adverse base effects in the fourth quarter and weak exports, although a pickup in corporate profitability on the back of declining input costs may provide an offset.

Among use-based industries, capital goods, which represent investment demand in the economy, contracted 20.4%, while consumer goods output did not see any growth from the same month a year ago.

Within the consumer goods segment, consumer durables grew 5.8% while consumer non-durables contracted 3.1%, signalling that the rural economy is still languishing after two consecutive years of poor monsoon rains.

Rishi Shah, economist at Deloitte India, said that while capital goods have always been volatile, given the current situation of excess capacity in the various parts of the economy and with banks in the process of cleaning up their balance sheets, any recovery in investments, and therefore in capital goods production, seems some way away.

“We expect industrial production to move up from here onwards, though still remaining in single-digit territory," he added.

The high negative contributers to IIP in January included cables, insulated rubber, antibiotics, stainless steel, sponge iron and passenger cars.

Car sales in India declined for the first time in 14 months in January as discounts dried up at the start of the new year and auto makers corrected inventory at dealerships the previous month, according to industry lobby group Society of Indian Automobile Manufacturers. The trend continued in February, with domestic passenger car sales declining 4.21% to 164,469 units.

In the budget, finance minister Arun Jaitley made significant increases in allocations to the rural job guarantee scheme, irrigation and rural roads scheme to revive demand in rural India. The government also increased allocations for national highway and railways sectors to boost infrastructure investment in the absence of recovery in private investment.

In its India Outlook released on Friday, rating agency Crisil Ltd said ground indicators such as credit growth, capacity utilization and investments indicate the recovery is nascent and this is reflected in low nominal GDP growth.

“Growth is expected to gain momentum as the government continues to undertake structural reforms, the steps taken in the last 18 months seep through, and the recommendations of the Seventh Pay Commission and OROP (one-rank one-pension) are implemented," it added.

CSO has estimated the real and nominal GDP growth to be 7.6% and 8.4%, respectively, in 2015-16. The Economic Survey has projected economic growth to be in the range of 7-7.75% in 2016-17 cautioning against significant global headwinds.

The International Monetary Fund (IMF), in its consultation report on India released last week, said the resilience of the Indian economy will be tested by an unfavourable global environment and slow investment recovery, even though positive policy actions along with a decline in oil prices have helped make the country the fastest-growing large economy in the world.

“Project implementation and supply-side challenges have been a drag on corporate investment for several years as they have chipped away at the financial strength of core industrial sectors. So the investment recovery is likely to be sluggish," IMF observed. It suggested structural reforms including implementation of the goods and services tax and labour policy changes to sustain recovery in economic growth.

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via