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Last Updated : Nov 13, 2019 04:43 PM IST | Source:

IIP numbers add to worry; what next for economy

India's industrial output continues to stutter and contracted 4.3 percent month-on-month in September.

The Indian economy seems to be caught in a stubborn downward spiral despite a raft of measures, including a deep cut in corporate tax, taken by the government to boost growth. The latest set of numbers point to a worsening situation.

India's industrial output contracted 4.3 percent month-on-month (MoM) in September, the second consecutive monthly fall, data released by the government on November 11 showed. Industrial output in August had seen a contraction of 1.1 percent.

With 4.3 percent contraction, industrial growth print was at its worst since the present series was launched in April 2012.


Industrial output, or factory output, is the closest approximation for measuring economic activity in the country's business landscape.

Manufacturing output, which accounts for more than three-fourths of the entire index, contracted 3.9 percent in September, against a decline of 1.2 percent in August.

Mining fell 8.5 percent in September, against a growth of 0.1 percent in August. Primary products fell 5.1 percent in September against a growth of 1.1 percent the earlier month. Capital goods production fell by 20.7 percent in September.

Consumer durables fell 9.9 percent in September against a growth of 4.1 percent in August.

Electricity production contracted 2.6 percent in September, while infrastructure goods production contracted 6.4 percent during the same month.

Where is the economy headed?

Experts say a sluggish Index of Industrial Production (IIP) may drag the gross domestic product (GDP) growth lower, which is already at a six-year low. India's GDP grew 5 percent in April-June 2019. GDP growth was 8 percent in the same quarter of 2018-19.

“Among use-based classifications, only intermediate goods grew 7 percent in September 2019, which raises some hope for positive IIP growth after a gap of a couple of months. Moreover, IIP growth in October 2019 is also likely to be in negative territory and only since November 2019 one can expect mild IIP expansion,” said Devendra Kumar Pant, Chief Economist and Senior Director, Public Finance, India Ratings & Research.

October 2019 passenger vehicle sales, which rose mildly by 0.28 percent, are expected to provide some support to the plunging IIP.

Manufacture of motor vehicles, trailer and semi-trailers has 4.857/3 percent weight in IIP, while other transport equipment have 1.7763 percent weight.

"In Q2FY20, these have contracted by 20.3 percent and 8.9 percent, respectively. However, it will be too early to term October 2019 automobile sale as a general turn around," Pant said.

Moody’s Investors Service, on November 7, changed its outlook on India’s ratings to 'negative' from 'stable', citing increasing risks that the country’s economic growth will remain lower than in the past.

Fitch Ratings, too, has lowered India's FY20 GDP growth forecast to 5.5 percent and said a large credit squeeze emanating from non-banking financial companies (NBFCs) had pushed economic growth to a six-year low.

The Reserve Bank of India (RBI) also cut its GDP growth estimate for the current fiscal to 6.1 percent from 6.9 percent.

A further rate cut likely

To boost growth, the central bank in October cut the primary lending rate by 25 basis points to 5.15 percent. This was the fifth rate cut since February.

Economists and market participants are hoping for a further rate cut when the bank holds its next policy meet in December.

The Indian economy was facing a structural growth slowdown originating from declining household savings rate, and low agricultural growth, Pant of India Ratings said. “Low agricultural growth is feeding into low agricultural and non-agricultural wage growth in rural areas, which is impacting rural demand adversely. We believe monetary authorities will continue to follow

accommodative monetary policy and expects further rate cuts in December 2019 monetary policy," he said.

The persistent slowdown in industrial growth may force RBI to go for another round of policy rate cut, said Rahul Gupta, Head of Currency, Emkay Global Financial Services. “However, a possible rise of headline inflation above the medium-term target of RBI (4 percent) may act as a point of caution before RBI does a rate cut,” he said.

Sujan Hajra, Chief Economist at Anand Rathi Securities, said in view of the slowing industrial growth, irrespective of inflation trajectory, the RBI may cut the policy rate by up to another 65 bps.

The near-term outlook

Experts say the economy looks to have hit the bottom and things should start improving soon. The government may come out with fresh measures, including some tax reforms.

An increase in intermediate consumption is a bright point that signals a recovery.

"IIP for September was expected to be poor. But the contraction is a bit higher than expected. A silver lining is an increase in intermediate consumption by 7 percent. This is indicative of recovery by December," said Dr VK Vijaykumar, Chief Investment Strategist at Geojit Financial Service.

"At eight-year low, industrial production in September 2019 was far below expectation and the slowdown was broad-based. Yet, with the recent turnaround in bank credit and government spending, the worst seems to be behind us," said Hajra of AnandRathi Securities.

Despite the worst performance in eight years, 11 of the 23 manufacturing categories did better in September against August 2019, Hajra pointed out.

Also, contrary to fall in incremental credit in August and September, bank credit accelerated in October. Moreover, with record spending in September, the government cleared a large part of arrears.

Hajra expects these points will underpin IIP growth for October 2019. Better-than-expected Diwali sales numbers also suggest the same.

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First Published on Nov 12, 2019 10:49 am
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