Factory production contracts by 1.1 per cent

New Delhi: Reflecting weakness in manufacturing, mining and power generation sectors, factory output, or the Index of Industrial Production (IIP), shrank by 1.1 per cent in August, the first contraction in more than two years and the worst in six years.

The IIP had expanded 4.3 per cent in July and 4.8 per cent in August last year, according to the government data released on Friday.

The contraction in factory production last happened in June 2017 when the IIP shrank by 0.1 per cent. But the decline of 1.1 per cent is the worst since a 4.4 per cent contraction in February 2013.

The manufacturing sector, which contributes over 77 per cent to the IIP, showed a decline of 1.2 per cent in output during August 2019 as against a growth of 5.2 per cent in the same month of last year. This was the lowest number in five years after October 2014 when the sector showed a negative growth of 1.8 per cent.

The recent slowdown in the automotive industry is a major reason behind the muted growth of industrial output, as it forms a significant portion of the overall manufacturing sector. As per the central bank reports, the share of transport equipment was 12 per cent in manufacturing GVA, or gross value added, and 2.1 per cent in overall GVA in 2017-18.

Capital goods output fell 21 per cent from a year ago and consumer durables contracted 9.1 per cent.

“Besides manufacturing sector, electricity generation declined by 0.9 per cent as against an expansion of 7.6 per cent in the year ago, while the growth in the mining sector was flat at 0.1 per cent,” data released by the National Statistical Office (NSO) showed.

However, experts said though the industrial output was expected to be weak, the actual number of minus 1.1 per cent for August is much weaker than what most have expected.

“If we look at the sub classification one can see that the shrinkage in output has come from a dismal performance in manufacturing, substantial fall in capital goods, consumer durables and infra, reflecting an underlying weakness in manufacturing and industrial activity and it needs to be addressed without much loss of time,” said Dr K Joseph Thomas, Head Research — Emkay Wealth Management.

Aditi Nayar, Principal Economist at Icra, said most likely the GDP growth may not meaningfully accelerate in the second quarter of FY20 from the multi-quarter low 5 per cent recorded in the April-June quarter, despite a favourable base effect.

The extent of pickup in consumption in the festive months and crop production in the rabi season will signal whether a material turnaround in demand and economic growth are in the offing, she said.