OPINION

Long haul ahead

Factory output continued to contract in July, albeit marginally slower than in June, reflecting the depressed economic conditions as the pandemic rages on. Quick estimates for the IIP show output across the three sectoral components of the index — mining, manufacturing and electricity — all shrank, dragging the overall index to a 10.4% year-on-year contraction. While this is slower than June’s 15.8% shrinkage, a closer look reveals that the rebound in momentum witnessed in the fiscal first quarter’s last month — when the economy reopened and the contraction narrowed sharply from May’s 33.9% fall — has dissipated appreciably. The most telltale sign of this flattening is the more than halved pace of growth in the solitary use-based industrial activity of the IIP’s six product groups, in which output had turned positive in June. Growth in consumer non-durables — it includes essential household consumables — slid back to 6.7% from the preceding month’s 14.3%, betraying the abiding weakness in private consumption spending. The other five groups posted double-digit contractions, with consumer durables and capital goods shrinking 23.6% and 22.8%, respectively. If the trend in durables attests to the RBI’s evaluation last month that “private consumption has lost its discretionary elements across the board”, the capital goods data point to a dismal picture on the investment front. With demand-starved companies operating their factories well below capacity, there is little indication that the protracted six-quarter slump in this key sector, which encompasses the plants and machinery that manufacturers order when expanding or starting new ventures, is anywhere close to reversing momentum.

Electricity generation, however, provides some relief, with the contraction narrowing to 2.5% in July from June’s 10%. A deeper look at the 23 subcategories of manufacturing shows that only tobacco products and pharmaceuticals posted expansions in July, with the latter benefitting from the increased global demand for medicines, including generic drugs, in the wake of the pandemic. The manufacture of pharmaceuticals, medicinal chemical and botanical products climbed 22% in July, making it the solitary product to post an expansion of 1.8% over April-July. Textiles and garment manufacturing, employment intensive segments shrunk to 14.8% and 28.7%, respectively. To be sure, the IIP data come with a lag of six weeks and a few more recent indicators give room for some guarded hope. For one, the latest IHS Markit India Manufacturing PMI survey-based outlook signals that the sector likely posted some expansion for the first time in five months in August. And auto makers reported growth in shipments of passenger vehicles to dealers last month in anticipation of festive season demand. Still, to help sustain any incipient revival, the Centre will need to enact demand-supportive fiscal policies or risk seeing the slowdown prolong.