Industrial production unexpectedly shrank 0.8% in April from a year earlier — its first drop in three months — dampening euphoria over the recent robust GDP growth figures of 7.9% for the last quarter of 2015-16, reports fe Bureau in New Delhi.
The fact that capital goods output saw the worst contraction in 46 months in April (thanks to distortions introduced by a 96.2% slump in production of items such as rubber insulated cables) and consumer goods output shrank (by 1.2%) for the first time since May 2015 suggests depressed investment demand and weak rural consumption. Even manufacturing shrank 3.1% in April, its sixth contraction in seven months, IIP data released on Friday showed.
The latest data showed further widening of the gap between the IIP and core infrastructure sector growth. The six infrastructure industries, which make up for 38% of the IIP, grew a robust 8.5% in April, albeit on a favourable base. Similarly, while manufacturing in the IIP grew just 2% in the last fiscal, in the GDP data it jumped 9.3% in 2015-16, although the two indicators are not strictly comparable.
The contraction in manufacturing volumes in the last quarter of 2015-16, as revealed by the IIP, was at odds with the healthy growth in manufacturing GVA (9.3%) as well as corporate earnings, said Aditi Nayar, senior economist at Icra. “While the persisting contraction in manufacturing volumes in April 2016 is discouraging, this trend may reverse post a favourable monsoon and pay revision,” she added.
However, at 14.6% in April, the highest rise in electricity generation since June 2014 (albeit due to seasonal demand) offered some cheer, while better growth of consumer durables on a sequential basis during the month despite an unfavourable base remained a bright spot among the use-based industries.
Going forward, if the Nikkei/Markit data are any indication, manufacturing output may continue to remain under pressure. The PMI data showed manufacturing grew at its slowest pace in five months in May, which is not a surprise given that export orders still remain dry.
However, analysts feel good monsoon showers hold key to reviving rural (consequently private) demand as well as investment. Already the weather office has maintained an above-normal monsoon forecast (at 106% of a long-period average) for 2016 after two straight years of deficient rains. Moreover, according to the RBI data, earnings in the fourth quarter of 2015-16 suggest double digit growth in Ebitda levels for non-financial companies. The RBI’s latest rounds of forward looking surveys indicate an improvement in the overall business situation, “driven by a pick-up in capacity utilisation and in order books — both domestic and external”.
These developments have improved the expectation of business conditions in the first half of 2016-17, RBI governor Raghuram Rajan said in this week’s monetary policy review. “Public investment, especially in roads and railways, is gaining strength, though the continuing weakness in private investment is of concern,” he said, adding that demand will likely improve going forward and consumer confidence is seen as rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. A revival in rural demand may push up capacity utilisation by companies and in turn boost private investment.