IIP contracts for the second straight month

However, good monsoon, early onset of festive season raise hope of revival in demand for consumer durables, as farm incomes rise

Industrial production contracted for a second straight month in August, raising doubt over manufacturing recovery and justifying the policy rate cut by the Monetary Policy Committee (MPC) last week.

However, a good monsoon and early onset of the festive season have raised hope of revival in demand for consumer durables, on the back of rising farm income.

The Index of Industrial Production (IIP) fell by 0.7 per cent in August, compared to a decline of 2.5 per cent in July, according to data from the Central Statistics Office.

The IIP contracted by 0.3 per cent in April-August, first five months of this financial year, versus growth of 4.1 per cent in the corresponding period last year.

“The IIP data for August provided another disappointing print, with manufacturing volumes continuing to contract, despite the boost from the double-digit growth of steel, passenger vehicles and two-wheelers,” said Aditi Nayar, senior economist at ratings agency Icra.

Mining and manufacturing dragged down overall IIP for the month. The mining sector contracted by 5.6 per cent, from 0.9 per cent growth the previous month. The manufacturing sector, 75 per cent of the index, saw the intensity of decline get lower, to 0.3 per cent from 3.4 per cent in July. Dismal when compared with the 6.6 per cent growth in August last year.

Only six of the 22 sub-sectors, however, showed a decline in growth, with production of electrical machinery falling the steepest at 49.4 per cent. Radio, television and communication apparatus grew the fastest at 15.2 per cent.

The newly formed MPC, chaired by Reserve Bank of India (RBI) Governor Urjit Patel, cut the repo rate (at which the central bank lends) by 25 basis points to 6.25 per cent last week, to spur investment.

Electricity barely expanded at 0.1 per cent in August, although it has shown growth of 5.7 per cent in the first five months of this financial year.

The most volatile segment, capital goods, in the series saw production fall for tenth month in a row, by 22.3 per cent in August, against 29.49 per cent fall in July. These had grown 21.3 per cent growth in August last year.

If capital goods are excluded, the growth of IIP would be 2.5 per cent in August, compared to 2 per cent in July.

Cables, gems and jewellery, minerals, sugar, machinery and rice were the top negative contributors. Hot-rolled coils, stainless steel, telephone instruments, fruit pulp and air conditioners were the top positive contributors.

Consumer goods output grew by 1.1 per cent, compared to 1.5 per cent in July. Consumer durables, mainly white goods such as refrigerators and other appliances, grew by 2.3 per cent, against 5.8 per cent the previous month and 17 per cent in August last year. This demand is expected to rise in the coming months, due to the Pay Commission payout and higher farm incomes on the back of a good monsoon.

Car sales, however, have showed promising growth, with 9.5 per cent rise in August and 15.4 per cent in September.

Retail inflation, the RBI’s primary gauge, eased to a five-month low of 5.05 per cent, down from 6.07 per cent in July.

The government expects economy to expand between 7-7.75 per cent in 2016-17. The gross domestic product grew by a five-quarter low of 7.1 per cent in the first quarter of the current financial year.