Manufacturing hits a rough patch

There are two key takeaways of the industrial production data for June released on Monday - India's economy is slowing and the sanctity of data continues to remain questionable.

In my commentary last month, I had mentioned the rising level of inventory, due to clear evidence of a demand slowdown, would weigh on the sentiment of manufacturers in that they would prefer to reduce capacity utilisation and draw down on their inventory to meet demand. Ergo, they would reduce the level of activity. This is clearly playing out now, as India's industrial production contracted for two continuous months, with the data for May seeing massive downward revision. From an initial estimate of a contraction of 1.59 per cent to a revised estimate of a 2.82 per cent contraction - such a revision is unheard of. In June, industrial production contracted 2.2 per cent. As a result, for the first quarter of this financial year, industrial production contracted 1.1 per cent, the third-highest contraction since the crisis hit us. Manufacturing contracted 2.2 per cent in June, while the revised data for May shows contraction of 3.6 per cent, compared with the initial estimate of a contraction of two per cent.

That the malaise is widespread is also evident from the fact that the Purchasing Managers' Index data (which is a survey of large manufacturing units) is showing distinct signs of weakness; it is barely above 50 now (a reading of less than 50 indicates contraction).

Contraction of capital goods continued unabated - in 19 of the past 24 months, it contracted.

As mentioned earlier, some components of industrial production look susceptible. Office, accounting and computing machinery data show monthly expansion of 68 per cent in June, while it contracted 56 per cent in April and expanded 102 per cent in March. Similarly, manufacturing of radio, TV & communication equipment & apparatus rose 35 per cent in June compared to May.

The author is a New Delhi-based independent economist