IIP falls 1.9% in October, demonetisation may mean worse is yet to come

By: | Published: December 10, 2016 7:11 AM

However, as Icra’s principal economist Aditi Nayar points out, since electricity generation, auto sales and even coal output showed decent expansion of 10%, 11% and 5.5%, respectively, in November, there is a chance that the damaging impact of demonetisation could be somewhat masked in the case of the IIP.

If the Purchasing Managers' Index in manufacturing and services and indirect tax collections are any indication (they either slowed down or contracted in November), the Index of Industrial Production (IIP) may have fallen steeply in November (Reuters)If the Purchasing Managers’ Index in manufacturing and services and indirect tax collections are any indication (they either slowed down or contracted in November), the Index of Industrial Production (IIP) may have fallen steeply in November (Reuters)

Industrial production shrank an annual 1.9% in October — worsening from a 0.7% rise in the previous month — suggesting an industrial recovery was elusive even before the November demonetisation move disrupted economic activities in November. If the Purchasing Managers’ Index in manufacturing and services and indirect tax collections are any indication (they either slowed down or contracted in November), the Index of Industrial Production (IIP) may have fallen steeply in November.

However, as Icra’s principal economist Aditi Nayar points out, since electricity generation, auto sales and even coal output showed decent expansion of 10%, 11% and 5.5%, respectively, in November, there is a chance that the damaging impact of demonetisation could be somewhat masked in the case of the IIP.

Nevertheless, what is particularly worrisome is that capital goods — a gauge for fixed corporate investment — contracted for 12 months in a row. Without the 25.9% plunge in capital goods output, the IIP would have grown 2% in October. Within the capital goods segment, rubber insulated cable — which contracted as much as 92.9% in October — alone knocked almost 3.8 percentage points off the IIP. Demonetisation is expected to only worsen the situation as economists warn of companies deferring investment plans in times of demand compression.

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Although the Diwali holidays may have contributed to the fall in output, consumer non-durables dropped a worse-than-expected 3% in October, down from a 0.1% expansion in September. The sector had witnessed marginal expansion in September after 10 straight months of contraction. This suggests rural demand continues to remain tepid. Consumer durables, too, suffered from an unfavourable base (it had grown 41.9% in October last year) and rose just 0.2% in October, compared with 13.9% in the previous month, despite the festive demand.

With demonetisation expected to have hurt the informal sector (which accounts for roughly 45% of the country’s GDP) more, rural demand may continue to suffer for some more time even if the country harvests a better kharif crop after two straight years of drought through 2015. This means the bad news will continue for the consumer goods segment in the coming months as well.

Already, the latest tax collections data also confirmed the economy’s demonetisation pangs. Although annual growth levels were robust, indirect tax collections for November 2016 showed a decline of 13.9% over October 2016. Much, however, depends on government spending to kick-start the economic engine now.

Although the Reserve Bank of India said demonetisation “could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3” in the Fifth Bi-monthly Monetary Policy Statement Resolution of the Monetary Policy Committee this week, it has lowered growth forecast from 7.6% to 7.1% for the current fiscal. Already, GDP grew 7.1% in the second quarter, compared with 7.3% in the previous quarter, with investment contracting 5.6%, falling for a third straight quarter.

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