The contraction of industrial production, as measured by Index of Industrial Production (IIP), in April is a very shocking piece of economic data, say analysts. April IIP was reported at (-)0.8%, the first contraction in industrial output in three months.
The fact that IIP came in the negative territory is not the only bad news. What has economists and analysts worried is that no signs of sustainable recovery are visible in the coming quarters.
Says Arun Singh, Lead Economist at Dun & Bradstreet India, “IIP data is not on expected lines. We were eyeing a positive number and the negative IIP is a shock, to the say the very least. The fact that the non-core sector is contracting is a very worrying factor and the government needs to look into this on priority.”
Read in detail: Industrial output contracts 0.8%; first contraction in 3 months
Arun Singh goes on to say, “The capacity utilisation rate has come down to 72% from around 90% to a few years back. There is a lot of idle capacity in the system and till that is utilised, the industrial output will not recover sustainably.” “In fact, I don’t see the IIP data recovering sustainably in the next six months, at least,” he tells FE Online.
Idle capacity is the biggest reason why IIP is not retaining its trend of being in the positive territory, agrees DK Srivastava, Chief Policy Advisor at Ernst Young India. Srivastava tells FE Online, “The fact that capital goods continue to exhibit contraction, means that there is still perceived capacity under-utilisation in the system.”
The capital goods output, which is a barometer of investment, declined sharply by 24.9 per cent in April compared to a growth of 5.5 per cent during the same month last year.
Srivastava explains, “Exports growth has been bad for a very long time and whatever capacity that was built in my manufacturers to cater to export demand is lying idle. The domestic demand is not sufficient to make up for it, also because of many of the manufacturers of export oriented products are taking a hit on their incomes. The government spending is also not enough to make up for the lack of private investment, given the stiff fiscal deficit target.”
“The IIP data is positively disappointing. Whatever hopes there were of green shoots in the sector have been completely dashed. I don’t see the industrial growth recovering anytime soon,” he adds.
Manufacturing sector which constitutes over 75 per cent of the index, contracted by 3.1 per cent in April this year compared to a growth of 3.9 per cent in same month last year.
In terms of industries, nine out of the twenty two industry groups in the manufacturing sector have shown negative growth during the month of April 2016.