Growth in industrial activity dipped to a 21-month low in March, contracting 0.1% due in large part to a continuing slowdown in the manufacturing sector, according to official data released on Friday.
The Index of Industrial Production (IIP) contracted in March for the first time since June 2013. To further put this contraction in perspective, the IIP grew a robust 5.33% in the same month of last year, and 4.39% in March 2017.
Within this, the manufacturing sector contracted by 0.43% in March, the second consecutive month of contraction (it contracted 0.39% in February) and the third consecutive month of slowing growth.
“The broad signals for the economy is a continuing slowdown and this is confirmed both from the output side and signals from the demand side,” said D.K. Srivastava, chief policy adviser, EY India.
“The IIP numbers are giving the output profile of contraction and on the demand side, the sales of different sectors have been slowing.”
Rate cut
One of the primary reasons for the slowdown in the overall economy is that the government has very little room to manoeuvre on the fiscal side, even though the Reserve Bank of India has done what it can on the monetary policy side with two successive interest rate cuts.
“As per the use-based classification, contraction in capital and intermediate goods (indicative of subdued investment activity) further resulted in slowdown in the industrial output,” Care Ratings said in a report. “Uncertainties over general elections could be cited as one of the major reasons of lower activity in these segments.”
The capital goods sector contracted for a third consecutive months, by 8.66% in March compared with a contraction of 8.92% in February. Intermediary goods sector contracted for the fifth consecutive month, by 2.55% in March, compared with a contraction of 5.05% in the previous month.
“The fiscal deficit has exceeded the limits and even the revised estimates numbers might not prove to be true,” Mr. Srivastava added. “Because of this, there would be considerable constraints in stimulating the economy.There is not likely to be any big push as far as Central government budget expenditure is concerned. Even when new government comes in, they will find it difficult.”
On the demand side, the consumer durables sector also contracted in March by 5.07% after being positive for three consecutive months, which is symptomatic of weak demand conditions in the country, Care Ratings added.
Infrastructure sector, however, saw a strong turnaround in growth in March, coming in at 6.4%, up from 2.1% in February. The mining and quarrying sector saw growth slowing to 0.78% from 2.18%.
The electricity sector witnessed a slight acceleration in growth to 2.17% in March from 1.32% in February.
The general outlook for the upcoming months is subdued, according to economists and ratings agencies alike, who say that there is still no certainty about the RBI cutting rates in its monetary policy review in June.
“The RBI will wait for the inflation numbers to come out and see in what way it is trending because of the pressure on oil prices,” Mr. Srivastava said.
