Poor show: factory output contracts 1.9% in October

The Index of Industrial Production (IIP), a measure of factory output, contracted by 1.9 per cent in October. Analysts reckon that an unfavourable base effect and the many holidays in October may account for the disappointing performance.

The contraction in October contrasted with the growth of 9.9 per cent in October last year. In September 2016, the IIP had recorded a print of 0.7 per cent. And for the April-October 2016 period, the IIP contracted 0.3 per cent as against a growth of 4.8 percent in the same period last year.

More bad news on the way The contraction in October gives credence to economists’ contention that some more negative data on factory output may be expected in the coming months, given the likely impact of demonetisation on consumer sentiment, and therefore on demand.

The October contraction was also because manufacturing, which has a weightage of about 75 per cent in the IIP, contracted 2.4 per cent from 10.6 per cent growth in the same month last year. In use-based classification, capital goods continued to be a picture of worry, with a contraction of 25 per cent in October. Capital goods have contracted continuously for the last 12 months.

Richa Gupta, Senior Economist, Deloitte in India, said the outlook on the industrial sector does not look positive, as one will see the impact of demonetisation playing out in the next 3-6 months. Car companies have cut back on production and there is a general lack of demand for durables, she noted.

“This would also mean that any recovery in the investment cycle will now be delayed. The Indian economy may slow further in the coming months, especially in the wake of the negative effects of demonetisation,” Gupta added.

Aditi Nayar, Principal Economist, ICRA Ltd, said the seeming collapse in the growth of consumer durables from the nine-month high 13.9 per cent in September 2016 to the marginal 0.2 per cent in October 2016 led to the sequential deterioration in the performance of the IIP. Additionally, the mild contraction in consumer non-durables and the sharp contraction in capital goods exerted a drag on industrial output in October 2016.

Overall, the contraction in headline IIP, as well as the muted 2 per cent growth in IIP-ex capital goods, is disappointing, she added.

Outlook Nayar said a sharp pick-up in the growth of electricity generation, Coal India’s output as well as automobile production in November 2016, would counteract the impact of the disruption caused by demonetisation on production in the unorganised sectors as well as the broader consumption sentiment.