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Fragile nature of economic recovery: IIP growth inches up to 1.9% in March

In signs that both private consumption and investment are yet to turn the corner on a sustainable basis, growth in capital goods output slowed while both consumer durables and non-durables production shrank, albeit at a slower pace than the previous month.

Still, the index grew for the first time in three years in FY22.
Still, the index grew for the first time in three years in FY22.

The index of industrial production (IIP) grew at 1.9% in March from a year earlier, having crept up only marginally from 1.5% in the previous month, suggesting the fragile nature of the economic recovery. However, given the sharply-contracted base in the wake of Covid curbs during the second wave, industrial output in April may even record a double-digit expansion, analysts said.

Official data released on Thursday showed that the IIP grew as much as 12.5%, sequentially, in March. But it was partly driven by seasonal factors that led to a spike in electricity generation and also weighed on manufacturing. With this, the IIP grew 11.3% in the last fiscal, driven by a favourable base (it was -8.4% in FY21).

Still, the index grew for the first time in three years in FY22.

In signs that both private consumption and investment are yet to turn the corner on a sustainable basis, growth in capital goods output slowed while both consumer durables and non-durables production shrank, albeit at a slower pace than the previous month.

Capital goods production grew just 0.7% in March against 2% in the previous month. Consumer durables and non-durables witnessed contraction of 3.2% and 5% in April, compared with that of 8.7% and 5.8%, respectively, in February. In fact, for durables, it was the sixth straight month of fall.

Coupled with an elevated inflation, the sluggish industrial activities will complicate the central bank’s task of curbing underlying price pressure in the economy when global commodity prices are moving up without upsetting the growth dynamics. Some analysts have pencilled in a further repo rate hike of 40-50 basis points by the monetary policy committee in June.

While growth in manufacturing improved to 0.9% in March from 0.5% in the previous month, that of electricity and mining rose to 6.1% and 4%, respectively, from 4.5% each in February.

Of course, at the use-based classification, four segments witnessed growth in March – primary goods (5.7%), capital goods (0.7%), intermediate goods (0.6%) and infrastructure goods (7.3%).

Icra’s chief economist Aditi Nayar said: “A majority of high-frequency indicators witnessed an improvement in their growth performance in March 2022, aside from a contraction in the output of CIL (after a gap of 11 months), and a sharp moderation in the y-o-y growth of non-oil merchandise exports, based on which we expect the IIP growth to accelerate to 3-5% in the just concluded month.”

Economists at India Ratings said: “The pattern of growth across used-based classification suggests that weak consumption demand is likely to witness more headwinds in the coming months from high inflation and reversal of interest rate cycle, but the demand for infrastructure goods may continue due to the sustained government capex spending.” They expected that consumption demand in view of high inflation and rising interest rate will remain a major risk to the economic recovery.

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