New Delhi: India’s industrial production contracted by 0.4% in December on the back of demonetisation of high value currencies, a month after recording a 13 month high growth due to positive base effect.
In November, the index of industrial production (IIP) grew 5.7%.
Data released by the Central Statistics Office showed while mining and electricity output grew 5.2% and 6.3% respectively in December, manufacturing contracted by 2% during the month.
Capital goods, which is a proxy for investment demand in the economy contracted 3% in December. However, the impact of demonetisation was clearly visible from the 5% contraction in production of consumer non-durables and 10.3% fall in production of durables, signalling that consumption demand in both rural and urban demand has been impacted.
The 76th round of the Reserve Bank of India’s industrial outlook survey suggests that financing conditions facing the manufacturing sector have worsened in Q3 of 2016-17 and are expected to remain tight in Q4. This is corroborated by the sharp slowdown in bank credit to industry and continuing sluggishness in the investment climate in some sectors.
The RBI which kept its policy rates unchanged earlier this week said growth is expected to recover sharply in 2017-18 as discretionary consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17. “Second, economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, is expected to be rapidly restored,” it added.
Lower interest rate due to better transmission of past policy rate cuts and stepping up of capital expenditure and boosting of rural economy will also revive consumption and investment demand, RBI said.