IIP in Dec dives to a 10-month low as covid hits output

The high base of the year-ago period could also be attributed to the slower growth.

Index of Industrial Production (IIP) growth slowed to 0.4% in December from 1.34% in November, data released by the National Statistical Office showed on Friday.

The slowing growth even before the pandemic’s third wave lashed the country in January indicates India’s economic recovery is still fragile and justifies the central bank’s decision to maintain a dovish stance to support growth even as major central banks take a hawkish turn to tamp runaway inflation.

Economists expect industrial activity to recover in the coming months as the base effect eases, and more substantially so in the next fiscal, as the capital expenditure push in the budget for the next fiscal facilitates industrial recovery.

“Lacklustre IIP growth puts a question mark on the current recovery. It also indicates that policymakers may have to take more measures to support industrial recovery as high commodity prices have made most inputs, particularly fuel and materials, quite expensive,” said Sunil Kumar Sinha, principal economist, India Ratings and Research.

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Cumulative industrial growth in the nine months to December stood at 15.3% compared with a 13.3% contraction in the year earlier.

Manufacturing, which accounts for 77% of IIP, shrank 0.1% in December from a 0.7% growth in the previous month.

“The contraction in capital goods, consumer durables and consumer non-durables, along with a feeble growth in the remaining categories, add heft to the MPC’s decision to remain growth-supportive in light of the incomplete recovery,” said Aditi Nayar, chief economist, ICRA Ltd. However, Nayar pointed out that 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 Ltd’s output.” She expects IIP to grow by 1-2% in January as the base effect wears off.

Consumer durables declined for the third straight month in December, reporting a 2.7% contraction after shrinking 5.3% in November.

“The pent-up demand story witnessed in the earlier months has eased with the mini-lockdown contributing at the margin,” said Madan Sabnavis, chief economist, Bank of Baroda. The measures announced in the budget should help industry, though that would be seen only post-April, added Sabnavis.

Consumer non-durables reported a 0.6% decline in production activity during the month from a 0.4% growth in November.

Capital goods contracted for the third straight month in December by a sharp 4.6% versus a 2% decline seen in the previous month.

“Capital goods contracted in year-on-year terms, as well as relative to the pre-covid level, highlighting the tentativeness in the investment cycle,” said Nayar.

Despite the third wave, Nayar expects factory capacity utilization to improve to 71-72% in the ongoing quarter. According to RBI, capacity utilization rose to 68% in the fiscal second quarter from 60% in the preceding three months. “But the rise will not be enough to trigger a pickup in the private capex cycle,” added Nayar.

The infrastructure and construction goods segment grew 1.7% in December from 3.1% in the previous month “despite the easing of weather-related disruptions in south India,” noted Nayar.

Electricity production recovered marginally to 2.8% in December from 2.1% in November.

Ten out of 23 sub-sectors contracted, with the sharpest decline seen in the ‘electrical equipment’ and ‘manufacture of machinery and equipment’ segments at 15.6% and 13%, respectively.

The motor vehicles segment posted a 4.5% decline, according to the data. Total passenger vehicles sales in December fell 13% from a year earlier, according to industry body Society of Indian Automobile Manufacturers, as the shortage of semiconductor chips continued to impact production.