IIP shrinks 0.8% in April

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New Delhi: India’s factory output faltered in April, contracting once again after a gap of two months, as packaged food production and capital goods fell, signalling a persistent agrarian crisis and lack of private investment demand in Asia’s third largest economy.

The Index of Industrial Production (IIP) shrank 0.8% in April compared with a growth of 0.3% the previous month, driven by a 3.1% contraction in manufacturing activity. During April, the mining and electricity sectors held the fort, growing 1.4% and 14.6%, respectively.

While the volatile capital goods segment—a proxy for investment demand in the economy—contracted for the sixth month in a row by 24.9%, consumer durables expanded by 11.8%. However, a fall in production of fast-moving consumer goods, or consumer non-durables, for the tenth time in the last 13 months by 9.7% squeezed consumer goods, which shrank by 1.2%.

The severe drought in Maharashtra and Karnataka, and the consequent shortfall in sugarcane production have added a further downside to non-durables’ growth over the last two months. An estimated 330 million people in 10 states have been affected by the drought.

Shubhada Rao, chief economist at Yes Bank Ltd, said the weakness in capital goods is definitely at odds with the trends in public capex, which have shown traction over the last few months, especially in sectors such as railways and roads. “This perhaps is an indication of investment appetite remaining weak in the private sector,” she added.

Out of 22 industries, nine sectors saw a fall in output, led by electrical machinery (-55.9%), food products (-24.5%) and tobacco products (-17.6%). On the other hand, industries such as furniture (28%); radio, TV, communication equipment (18.8%); and office, accounting and computing machinery (18.7%) led the growing segments in IIP.

In May, a temporary shutdown of cigarette making plants by ITC Ltd (protesting against the government’s new pictorial warnings diktat on cigarette packs) could further impact production of tobacco products, which has seen a consistent fall in production, growing only at 0.2% in 2015-16.

However, factory output may get some support from higher sales of utility vehicles, up 36% in May, even though car sales dropped by 0.86%, according to data from Society of Indian Automobile Manufacturers on Thursday.

The India Meteorological Department’s forecast of above-normal rainfall after two years of below-normal rain could boost rural demand, while the impending implementation of the seventh pay commission award is likely to stimulate urban demand.

CARE Ratings in a research note on Friday said industrial production in 2016-17 is expected to pick up in the coming months on the back of improved infrastructure spending by the government and an improvement in the consumer goods segment. “The growth in consumer goods segment is slated to strengthen in the second half of the year with expectations of increased urban and rural demand. The increase in consumption demand in turn could help the capital goods segment,” it added.

An increase in cargo traffic at major ports, a pickup in automobile sales especially two-wheelers and three-wheelers, commercial vehicle sales, air passenger and freight traffic, cement production and steel consumption are expected to facilitate a consumption-led recovery of the economy in 2016-17, the Reserve Bank of India (RBI) said in its monetary policy review on Tuesday.

RBI held on to its policy rates in its review on 7 June, citing a sharper-than-anticipated surge in inflationary pressures. In April, retail inflation rose to 5.39% as food inflation picked up by 6.21%, driven by higher prices of pulses, sugar, meat and fish. Retail inflation data for May will be released on Monday.

Data released by the Central Statistics Office last month showed the economy grew 7.6% in 2015-16 and 7.9% in the March quarter, signalling sequential improvement in growth drivers. The government expects gross domestic product growth to cross 8% in 2016-17. RBI, which tracks gross value added at basic prices, said the economy will expand by 7.6% in 2016-17 against 7.2% in 2015-16.