India’s industrial recovery slowed sharply in December, with output growing just 0.4% year-on-year, and manufacturing activity contracting 0.1%, as per official estimates for the Index of Industrial Production (IIP).
Electricity output grew 2.8%, while mining activity rose 2.6%. The IIP data also shows capital goods output shrank 4.6% in December while consumer durables and consumer non-durables saw output shrink 2.7% and 0.6%, respectively. Consumer durables contracted for the fourth straight month.
Growth in other use-based segments was marginal and couldn’t lift the overall industrial output trend, with primary goods output rising 2.8%, infrastructure and construction goods growing 1.7% and intermediate goods seeing a mere 0.3% uptick.
Industrial output had grown a mere 1.34% in November as per revised data from the National Statistical Office (NSO). The NSO also revised upwards IIP numbers for September and October 2021, to 4.35% from 3.1% and to 4.01% from 3.2%, respectively, using updated production data. Economists said the latest IIP print was lower-than-expected.
Recovery in jeopardy
“Contrary to our expectations of 2.5%... growth has come in at 0.4% which is disappointing,” said Madan Sabnavis, chief economist at Bank of Baroda. “The pent- up demand story witnessed in the earlier months has eased with the mini lockdown,” he added, noting that the main engines of growth the government was banking on for the coming year — investment and consumption — had fared dismally.
India Ratings economists Sunil Kumar Sinha and Paras Jasrai said that the lacklustre IIP growth puts a question mark over the current recovery and indicates that policy makers may have to take more measures as high commodity prices have made most inputs, particularly fuel and materials, expensive.
ICRA chief economist Aditi Nayar said the contraction in capital goods was not just a year-on-year phenomenon, but also relative to the pre-COVID level, highlighting the ‘tentativeness in the investment cycle’. Citing a recent RBI assessment that capacity utilisation in the second quarter of 2021-22 was 68%, Ms. Nayar said she expects this would improve to 71-72% in the ongoing quarter despite the third wave, but not be enough to trigger a pickup in the private capex cycle.
However, barring capital goods, all other use-based segments surpassed pre-pandemic levels in December for the first time since March last year, India Ratings pointed out, but added that the persistent weak consumption demand is a major risk to sustaining the economic recovery.
“Unlike the adverse impact on contact-intensive services and mobility, the third wave has not been hugely disruptive for the industrial sector in January, as evidenced by the mild sequential decline in the monthly average generation of GST e-way bills, and rise in electricity and Coal India’s output.We expect the IIP to grow by 1%-2% in January 2022, as the base effect eases,” estimated Ms. Nayar.