India's industrial output slips back into negative territory in January

Industrial output shrinks 1.6% in January

Jolting recovery hopes, India’s industrial production slipped back into contractionary territory in January because of the dismal performance of consumer goods, capital goods and mining sectors, the official data showed on Friday.

The Index of Industrial Production (IIP) declined by 1.6 per cent in January on a year-on-year (YoY) basis, as against 1.56 per cent growth in the previous month, according to the data released by the National Statistical Office. The December number saw a slight upward revision from the 1 per cent estimates earlier.

Industrial activity has posted growth in only three months in the current financial year so far. The IIP had turned positive in September after a gap of six months on the back of the festival season demand. However, a rise in Covid cases and the re-imposition of lockdown in several cities pose upside risks to the country’s growth outlook.

“While we had anticipated deterioration in the IIP's performance in January 2021, we didn’t expect it to revert to contraction. After a rapid recovery seen till October 2020, the trend in the IIP has turned volatile in the last three months, suggesting that the economy has entered into a consolidation phase with an underlying momentum that is relatively subdued,” said Aditi Nayar, principal economist, ICRA Ratings, adding, “The IIP may continue to contract in February.”

Manufacturing sector activity contracted by 2 per cent in January, compared with 2.1 per cent growth in the previous month, led by a sharp decline in the consumer non-durables sub-sector.

Consumer non-durables, comprising essential goods with a broadly non-elastic demand, contracted by 6.8 per cent in January, as against a 0.6 per cent decline a year ago. Consumer durables, comprising mainly white goods and mobile phones, saw 0.2 per cent contraction, as against 5.7 per cent growth in December and 3.7 per cent contraction last year.

“We remain circumspect regarding the intensity of the rebound in consumption immediately after the vaccine roll-out widens, as some categories of households may choose to rebuild the savings that they had drained during the lockdown and post-lockdown period,” said Nayar.

Madan Sabnavis, chief economist, CARE Ratings, said the negative growth in consumer goods was a major disappointment, “which was expected to be positive and hence is the surprise factor for us”. The pent-up demand story has quite clearly paused as seen by these numbers, said Sabnavis, adding that he expected growth to be negative in February but would turn positive in March as growth last year was down by 18 per cent.

The manufacturing category makes up 77 per cent of the index.

The capital goods sector contracted by 9.6 per cent, despite a very low base of 4.4 per cent contraction in January last year. While the mining sector posted 3.7 per cent contraction during the month, electricity grew by 5.5 per cent, indicating a pick-up in demand from factories.

The IIP data is released with a lag of six weeks and compiled with data received from 16 source agencies, which, in turn, receive data from the producing factories and establishments.

Of the 24 sub-sectors, only six sectors posted growth in January, with chemicals and chemical products growing by 3.1 per cent, rubber and plastic products by 6.3 per cent, and wood products other than furniture by 6.9 per cent. Wearing apparel, pharmaceuticals, and furniture sub-sectors saw contraction of 20.2 per cent, 11.5 per cent, and 18 per cent, respectively.

Weak growth and inflationary pressure in non-food articles may force the monetary policy committee of the Reserve Bank of India to remain accommodative. During the MPC meeting held in February, the RBI had left policy rates unchanged.