IIP contracts 0.7% in August; economy struggles as monsoon, spending impact yet to show up

Remaining in the negative zone for the second month in a row, industrial production contracted by 0.7 percent in August due to slump in manufacturing, mining and capital goods segments, the government data showed on Monday pointing towards a tepid economy still struggling to revive despite the high GDP growth numbers.

The factory output, measured by movement in Index of Industrial Production (IIP), had slipped to 8-month low of (-)2.49 percent (revised) in July on account of declining output in manufacturing and capital goods sectors.



The IIP slump in August is lower than July.

On cumulative basis, the factory output in April-August contracted by 0.3 percent, compared with growth of 4.1 percent in the year-ago period.

The official data released Monday showed the manufacturing sector, which constitutes over 75 percent of the IIP index, contracted by 0.3 percent in August as against 6.6 percent expansion in the same month last year.

The capital goods output registered a steep decline of 22.2 percent in the month, against a growth rate of 21.3 percent in the last year.

The data revealed that mining activities shrunk by 5.6 percent in August as against a growth of 4.5 percent in the year-ago period.

Power generation remained almost flat (0.1 percent) compared with an expansion of 5.6 percent a year ago.

Output of consumer durables registered a growth of 2.3 percent while growth in non-durables segment was almost flat.

Overall, consumer goods production recorded a growth 1.1 percent in August compared to 6 percent a year ago.

In terms of industries, seven out of 22 industry groups in the manufacturing sector have shown negative growth during August year-on-year.

Some important items showing high negative growth during the current month include cable, rubber insulated, sugar machinery, woollen carpets, gems and jewellery, and rice.

Some important items that have registered high positive growth include fruit pulp, air conditioner, instant food mixes, ship building and repairs, scooter and mopeds, stainless/alloy steel and boilers.

Richa Gupta, senior economist, Deloitte India, said the latest figures depict a sluggish industrial economy that is beset by a lack of investment demand.

"A second negative print has essentially come on the back of another month of contraction in the capital goods segment with the usual category, rubber and insulated cables, exerting downward pressure. On the other hand, consumption has remained somewhat stable with consumer durables registering growth and important categories such as automobiles doing well. Basic goods and intermediate goods continue to register expansion. The heavyweight manufacturing segment has seen production levels stagnate from the previous month and growth trends remain muted," Gupta said.

Dnanjay Sinha of Emkay Global, meanwhile, said in a note that the even after excluding the volatile rubber-insulated cables, the IIP growth is a subdued 2.4 percent. The rubber-insulated cables have been a component that has played havoc with the IIP data for quite a while now.

"Nearly 76% of the manufacturing industries have recorded sub-5% growth. Rising WPI inflation is also impacting some of the IIP components particularly from the capital goods sector (which had benefitted when WPI was in deflationary mode Jul-Oct’15 period)," Sinha has said.

Also the favourable monsoon and high government revenue spending of 11 percent on year during the April-August period this year have not yet
reflected in the private consumption growth.

However, consumption patterns are likely to witness in the months to come. "Going forward, we could see some improvement as consumption picks up and we get positive prints on the consumer non-durables side with the effects of monsoons filtering through the rural economy," Gupta of Deloitte said.

Sinha too concurs that the multiplier effect of the fiscal stimuli is likely to be reflected with a lag of two quarters.

"We might witness some improvement in demand conditions in H2FY17," he says.

Though it remains to be seen whether these one-off seasonal spikes will indeed result in an all-round revival in industrial production and thus economy.

With PTI

Updated Date: Oct 11, 2016 09:07 AM

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