The industrial production contracted in August 2019, on account of weakness in the manufacturing sector.
The industrial production contracted in August 2019, on account of weakness in the manufacturing sector. The index of industrial production shrank by 1.1 per cent in August, which surged to 4.3 per cent in the previous month, the government data showed. The industrial production contracted for the first time after June 2017. The manufacturing sector, which contributes over 77 per cent to the IIP, showed a decline of 1.2 per cent in output during as against a growth of 5.2 per cent in the same month of last year. Amid a slowdown, the Indian economy registered a 6-year low growth rate of a mere 5 per cent in the first quarter, but the pessimistic factory out put has raised doubts on the improvement of the GDP growth in the subsequent quarters.
The IIP growth rate for the mining, manufacturing and electricity sectors stood at 0.1 per cent, – 1.2 per cent and – 0.9 per cent as compared to the corresponding period of the last year. As per the used based classification, capital goods contracted by 21 per cent and infrastructure & construction goods contracted by 4.5 per cent. Analysts polled by Reuters had forecast industrial output for the month to have grown at 1.8%.
“There is a growing likelihood that the GDP growth may not meaningfully accelerate in Q2 FY2020 from the multi-quarter low 5.0% recorded in Q1 FY2020, despite a favourable base effect. The extent of a pickup in consumption in the festive months and crop production in the rabi season will signal whether a material turnaround in demand and economic growth are in the offing,” said Aditi Nayar, Principal Economist, ICRA.
Notwithstanding an unfavourable base effect and the disproportionate impact of the weakness in a few segments of machinery and equipment, the sharp 21% contraction in capital goods output in August 2019 highlights the weakness in investment activity, she added.
A slowdown in the automotive industry is also a major reason behind the slow growth of industrial growth as it forms a significant portion of the overall manufacturing sector. The share of “manufacture of transport equipment” was 12.0 per cent in manufacturing gross value added (GVA) and 2.1 per cent in overall GVA in 2017-18, going by the figures provided by the RBI.
Meanwhile, the credit growth to the industry sector has also dropped in the last four months after accelerating continuously between August 2018 and April 2019, according to RBI.The credit is required by the industries to run the operation, expansion and to work at the fullest of its capacity. However, at the aggregate level, capacity utilisation declined to 73.6 per cent in Q1 FY20 from 76.1 percent in Q4 FY19. A decrease in the capacity utilisation indicates that the industries are producing less output than the previous level.
GVA growth of the industry, which remained 6.1 per in FY17 and 6.2 per cent in FY18, dropped steeply to a mere 1.7 per cent in the first quarter of the current fiscal year. Highlighting the importance of the industries, the RBI said in a recent report, “The downturn in the automobile sector in India, which could be attributed to several regulatory and institutional factors, was accentuated by a slowdown in demand. This has drawn considerable attention in view of the industry’s role in economic activity.”