Manufacturing decline drags IIP to negative zone in April

NEW DELHI: The new financial year has started on a muted note with industrial production contracting marginally in April, dampening sentiment days after data showed the economy grew at a healthy 7.6% in FY16 buoyed by an even faster 7.9% pace in the March quarter.

India’s industrial production shrank 0.8% in April after expanding for two months because of a 3.1% decline in manufacturing output, the Index of Industrial Production (IIP) released by the statistics office on Friday showed. The manufacturing sector has almost 75% weight in the IIP.

“The data is pretty disappointing and we expect it to remain sluggish without any significant growth in IIP going ahead,” said Soumya Kanti Ghosh, chief economic adviser at State Bank of India. The consensus expectation was for a small positive growth. Electricity generation grew 14.6% but mining output rose only 1.4%.

This is the first set of production data after the statistics office said the economy grew 7.6% in FY16. The Reserve Bank of India expects the country to clock 7.6% gross value added growth in the current fiscal, slightly higher than 7.3% in the last one. Consumer goods production fell 1.2% in April with consumer nondurables output—an indicator of rural demand—declining 9.7%.

Capital Goods Disappointing Production of consumer durables was up 11.8%, continuing the theme of contrasting robust urban demand. A 24.9%, contraction in capital goods, a proxy for investment, highlighted the persistently feeble contribution from the private sector in this regard. This is the sixth consecutive month of decline in capital goods production. “This reinforces the fact that there is weakness in investment demand,” said Crisil chief economist DK Joshi. “Moreover, the prospects of consumption-driven sectors are greater than the investment-driven ones due to the monsoon.

We expect IIP revival only in the second half of the calendar year.” Manufacturing PMI showed activity was barely in the positive zone in May. Passenger car sales grew 6.26% in May, down from 11% in April.

Economists are now pinning their hopes on monsoon to revive rural demand and thereby industrial output. The Indian Meteorological Department has predicted an above-average monsoon, ending two years of drought. “We expect demand for consumer non-durables to recover on the back of good monsoons,” said YES Bank chief economist Shubhada Rao.The monsoon, which has set in over Kerala and other parts of southern India, is expected to cover the whole country by July 15.