January IIP at 1.7%: Why a consistent downward trend in factory output data over last few months is worrying

Most economists typically approach the monthly Index of Industrial Production (IIP) numbers with a bit of caution. The reason is high volatility in factory output data, one-off factors that could tilt the numbers on either side or base effect that points that statistics is at play. But, that’s not the case when the IIP data begins to follow a particular pattern over a period of time, say more than 5-6 months. At this point, the numbers will point out the larger trend; this is exactly the reason why the IIP data of the last few months is worrying at this point. What does the numbers show? Since June, 2018 (7 percent), the IIP has been falling consistently, with the only exception being October, 2018 when the index recorded a sudden spike of 8.4 percent. In January, 2019, when the latest set of the IIP data is out, the reading was 1.7 percent. [caption id=“attachment_2623836” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] On a year-on-year basis, the growth across key verticals have been sliding, notably in the manufacturing segment. In January, the manufacturing sector growth stood at 1.3 percent as against 8.7 percent in the corresponding month of last year, in December, 2018 manufacturing grew at 3 percent, in November at negative .6 percent. Now look at electricity growth; in January, this component of the IIP grew at mere 0.8 percent compared with 7.6 percent a year ago. The same story goes with capital goods, consumer durables and non-durables. In fact, capital goods (indicates investment activity) contracted by 3.2 percent in January, 2019 as against double digit growth in the year-ago period. A consistent slowing trend of the IIP led by manufacturing sector’s poor performance thus confirms the slowdown in the economy and signals that even a 6.6 percent growth recorded in the third quarter, the slowest in at least six quarters, could be a case of overestimation. Clearly, the factory output data tells us that growth is not happening on the ground, especially in the manufacturing sector, no matter what the Gross Domestic Product (GDP) numbers say. Manufacturing sector is a major employer; now read this with the unemployment figures. The Centre for Monitoring Indian Economy (CMIE), recently said that at 7.2 percent, the country’s unemployment rate in February was worst in at least 29 months when labour force dwindled 25.7 million since September 2016. Separately, the National Sample Survey Office (NSSO) survey suggested that unemployment rate for skilled persons in the country doubled to 12.4 percent in 2017-18 from 5.9 percent in 2011-12 and the number of jobless among the educated, too, went up. A number of ground reports  also show that an unemployment crisis is unfolding in India. A persisting rural distress too indicates the economic slowdown. In Q3, the growth in this segment fell to 2.7 percent from 4.2 percent in the previous quarter and 5 percent in Q1. Besides, a slew of other indicators such as growth two-wheeler sales, stressed assets in banking sector and private investment data too have been pointing towards a sustaining slowdown in the economy. The IIP trend over last 6-8 months would perhaps put pressure on the Monetary Policy Committee (MPC) to go for a sharper rate cut as early as in April to support growth. Whether that will do any good in the economy, which doesn’t have a good record on monetary policy transmission, is another question. (Data support by Kishor Kadam)