Moneycontrol
Aug 11, 2017 08:24 PM IST | Source: Moneycontrol.com

India's factory slips to negative zone; falls 0.1 percent in June

Large scale destocking and inventory clearance by companies ahead of GST's rollout in July may have brought down production

Moneycontrol News

India’s factory output further slowed down in June, slipping into a negative zone of (-)0.1 percent from 1.7percent in May, mainly due to subdued mining and manufacturing output, coupled with continued cutting of inventories before implementation of the Goods and Services Tax (GST) from July.

Factory output measured by the index of industrial production (IIP) is the closest approximation for measuring economic activity in the country’s business landscape.

“As expected, inventory paring prior to the GST resulted in a mild contraction in manufacturing output of 0.4 percent in June 2017. As many as 15 of the sub-sectors of manufacturing recorded a YoY contraction in June 2017,” Aditi Nayar, Principal Economist at ICRA said.

IIP witnessed a robust growth of 8 percent a year ago.

Manufacturing sector’s growth continued to remain poor, with a negative growth of (-) 0.4 percent in June, compared with 1.2 percent in May and 7.5 percent in the same period last year.

Mining production also declined to 0.4 percent in June from (-) 0.9 percent in May and 10.2 percent a year ago, mainly due to a sharp contraction in coal output.

“The pace of contraction of the output of Coal India Limited (CIL) narrowed considerably to 0.3 percent in July 2017 from 7.2 percent in June 2017, which would boost the performance of mining sector in the just concluded month,” Nayar said.

Capital goods output, which is reflective of the private sector investment scenario, declined sharply by (-) 6.8 percent in June compared to a growth of 14.8 per cent during the same month last year.

Consumer durables continued to witness a negative growth at (-) 2.1 percent in June, compared with 4.5 percent jump during the same period last year and a (-) 4.5 percent fall in May.

Infrastructure or construction goods’ growth was 0.6 percent in June as compared with a robust 6.6 percent jump last year. Similarly, consumer non-durables jumped 4.9 percent in June from 8.3 percent in May and 11.4 percent growth last year.

“Notwithstanding the favourable base effect and the rebuilding of inventories post-GST, we expect IIP growth to trail the 5.2% rise recorded in July 2016,” Nayar said.

In May, the government announced a new series, shifting the base year to 2011-12 from 2004-05, changing the weights and adding new items to reflect current consumption patterns. The change in baseline for the IIP, made by the Central Statistics Office (CSO) was much needed, in order to map economic activities more accurately and project realistic data.

In the new series, manufacturing sector’s weightage has been increased to 77.6 percent from 75.5 percent, with electricity's share in the index witnessing a decline to 7.9 percent from 10.3 percent. The data also included renewable energy sources. Infrastructure or construction goods were the new addition in the index, with a substantial rise in the number of consumer durables and non-durables.

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