Industrial output enters negative zone, contracts 0.1% in June

This is the first time in the current fiscal that the industrial output has shown a decline. Segments like manufacturing and capital goods, mining, power generation, infrastructure/construction goods and consumer durables recorded poor performance.

A worker cuts metal inside a workshop manufacturing metal pipes in Mumbai, India.

Industrial activity in June contracted 0.1%, the slowest since June 2013, driven primarily due to a contraction in capital goods.

Growth in the Index of Industrial Production was 2.8% in May. In June, the capital goods segment witnessed a contraction of 6.77%, the most drastic since September 2016.

“Unsurprisingly, the unfavourable base effect, the reduction in inventories ahead of the transition to the GST, and slide in growth of non-oil exports culminated in a marginal contraction of 0.1% in the IIP in June 2017, a 48-month low performance,” Aditi Nayar, Principal Economist, ICRA said. “While mild, the year-on-year de-growth in June 2017 was pervasive, with 15 of the 23 sub-groups of manufacturing and four of the six use-based industries, recording a contraction in that month.”

The data showed that the manufacturing sector contracted marginally, by 0.41%, in June, from a growth of 2.61% in May. The mining sector witnessed a slight acceleration in growth to 0.4% in June from 0.2% in May.

Growth in the electricity sector slowed drastically from the 8.29% in May to 2.15% in June.

Consumer durables also witnessed a contraction of 2.13% in June from a growth of 0.8% in the previous month.

“Consumer durables and non durables continue to provide mixed signals regarding demand, with the former contracting by 2.1% in June 2017 and the latter rising by 4.9% in the same month, recording the best performance among the use-based groups,” Ms Nayar added. “The year-on-year contraction in capital goods output for the third consecutive month highlights the continuing sluggishness in private sector investment activity.”

Looking ahead, the outlook seems to be more optimistic, with the Goods and Services Tax expected to boost industrial output, and a favourable monsoon and the Seventh Pay Commission is expected to bolster consumer demand.

“Since GST has already kicked in, the restocking of inventories will take place that is likely to boost industrial output,” Care Ratings said in a note. “In addition, favourable monsoon with higher crop output and allowances paid due to 7th pay commission implementation is likely to push consumer demand in the second half of the year.”