Industrial output shrank 0.8% in August from a year before, the first contraction in 18 months, thanks to an unfavourable base, slowdown down in export orders and heavy monsoon downpour in select regions. This also suggests a credible industrial recovery is still far away, especially due to the fact that production didn’t improve even in the build-up to the festive season.
However, the index of industrial production will recover in September, as the unfavourable base effect wanes. The IIP had grown 13% in August 2021 but just 4.4% in September last year.
What worries analysts are the facts that export-sensitive sectors like textiles and garments and chemicals have registered a slowdown, while both consumer durables and non-durables segments contracted. The growth in capital goods, a gauge for investments, remained far from impressive.
Textiles output dropped 12.2% in August from 8.6%a year before, while that of garments shrank 18.3% against 15.2%. Even the output of chemical products grew at a slower pace of 5.3% against 6.9%.
Crisil chief economist DK Joshi said there are signs of slowdown seeping to other segments as well. The IIP dropped for capex-related segments, such as infrastructure and construction goods (1.7% vs 3.8% in the previous month) and capital goods (5% vs 5.7%). The drop in the domestic-oriented consumer non-durables just worsened to 9.9%–the worst slide since April 2020 and compared with 2.8% in July.
Even consumer durables output, too, shrank 2.5% in August, against a 2.3% rise in the previous month.
“India will not be immune to effects of global slowdown, which will play out over the next 12 months. The hit to agricultural incomes from uneven monsoon could also weigh on domestic demand. These factors are significantly adding downside risks for industrial outlook going ahead,” Joshi said.
However, this remained at odds with the PMI for the manufacturing sector, which remained firmly in the expansionary zone in July, with a reading of 56.4.
Manufacturing shrank by 0.7% in August, compared with a rise of 3% in the previous month. Similarly, mining contracted by 3.9%, against a fall of 3.3% in July. Electricity generation rose just 1.4%, against 2.3% in the previous month and 16% a year before.
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In the first five months of this fiscal, the IIP rose 7.7%, partly aided by conducive base in the first quarter when industrial activity was hampered last year due to the second Covid wave.
Icra chief economist Aditi Nayar said heavy rains dampened construction activity and electricity demand in August, and the bleak manufacturing output belied the hope generated by the robust GST e-way bill data.
However, the year-on-year growth of most available high-frequency indicators improved in September relative to August 2022, amidst the onset of the festive season. These include Coal India’s output, vehicle registrations, electricity generation, ports cargo traffic, rail freight traffic and diesel consumption. These will likely help the IIP to return to a positive, albeit modest growth, in the just-concluded month (September), Nayar said.
India Ratings principal economist Sunil Kumar Sinha said the negative growth in consumer durables is a “bit perplexing”, as usually such firms step up their production around this time to create adequate inventory to meet the festival season demand.
“Consumption demand is likely to witness more headwinds in the coming months from high inflation and the reversal of interest rate cycle. But the demand for capital/infrastructure goods may continue to get support from the sustained government capex spending,” Sinha said.