Global Economy

Industrial production contracts for first time in nearly 2 years


India’s industrial output contracted 0.1% in August, the first time it shrank in 22 months, pulled down by an unfavourable base and a drop in mining and electricity output, official data released Friday showed. The Index of Industrial Production had risen 4.7% in July and 10.9% in August 2023. For the first five months of the current financial year, industrial growth was 4.2% compared with 6.2% in the corresponding period last year. The contraction came on the back of a decline in the eight core industries of 1.8% in August, according to data released last month. The eight industries have a weight of 40.27% in IIP. Manufacturing activity, according to the HSBC Purchase Managers’ Index, stood at a three-month low of 57.5 in August.

Economists largely attributed the decline in August to the big jump in the year-earlier period. “The slowdown was on account of an unfavourable base,” said Rajni Sinha, chief economist, CareEdge. Sinha said heavy rain in August may have led to the slowdown in mining, which recorded a decline of 4.3%. Electricity output fell 3.7%.

IIP .

Economists expect a pick-up in activity on the back of a normal monsoon and the onset of the festive season. “The impact of a healthy monsoon on rural demand is expected to kick in the second half of this fiscal, which would support consumption,” said DK Joshi, chief economist, Crisil. Domestic demand is expected to rise in the early part of the festive season, Sinha said. A broad-based improvement in consumption and private capital expenditure is crucial for driving industrial activity. Manufacturing growth slowed to 1%, the lowest in nearly two years.

Ind-Ra sees IIP returning to positive territory. High-frequency indicators suggest a pickup in industrial activity, Paras Jasrai of Ind-Ra said in a note.

11 of 23 sectors see decline

Although the manufacturing growth was down to a 22-month low, it came on a high base,” he said. “The growth of e-way bill and coal production improved to 18.5% year on year and 2.5% YoY in September 2024, respectively (August 2024: 12.9% YoY, negative 7.5% YoY),” he said, adding that the contraction in other indicators such as electricity demand and petroleum consumption has also reduced in the same period.Ind-Ra expects IIP growth of 3% in September from the year before. Eleven of the 23 IIP sectors, such as pharmaceuticals, paper, food and beverages, witnessed a decline. Growth in capital and infrastructure/construction goods declined to a nine-month low of 0.7% and 1.9%, respectively, in August, on an unfavourable base. Intermediate goods sector growth stood at 3.0% year on year in the same period.

The high base effect dragged down primary and consumer non-durable goods by 2.6% and 4.5%, respectively. Ind-Ra noted that a sustained decline in consumer non-durables indicated that the stress in rural demand hadn’t bottomed out yet. A steady growth in consumer durables was a positive for consumption demand. Consumer durable goods recorded the highest growth among use-based segments at 5.2% in August.



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