Negative IIP print indicative of poor underlying sentiment

GDP growth to languish in the sub-6% range for another two quarters

After the eight core industries index grew at 5.1 per cent in September, it was widely believed that industrial activity was reviving, as the trend for the previous seven months was much lower. Given that these eight core industries have a 37 per cent weight in the Index of Industrial Production, it was safe to assume so. Industrial production data for September has contracted by 0.4 per cent year-on-year (y-o-y), against the expectation of a 2.8 per cent expansion. Not just is the print negative; the reading for August has also been revised downwards, to 2.3 per cent from the earlier 2.7 per cent.

What went wrong? Like the monthly variations in industrial production data, economists are divided on its implications. Leif Eskesen, chief economist for India at HSBC, believes the weakness is mostly due to the fickle capital goods segment. Others believe the reality is not rosy and a broad-based revival is a little away. The revival in industrial activity is not broad-based — but that was evident from the core sector numbers, driven largely by an uptick in cement, refining and coal. Cumulative growth in industrial activity during the first half of the financial year is 0.1 per cent. Economists are now saying that hopes of a recovery, based on a promising manufacturing PMI and a pick-up in core sector industries, might just get dashed. Tirthankar Patnaik of Religare does not expect a rebound before the fourth quarter. “While the festive season should provide some upswing, it is clear that hopes of the economy bottoming out in the second quarter are belied for now,” he says.

This is because the weakness is not limited to select industries or sectors. While mining and quarrying grew at a faster than expected pace of 5.5 per cent, electricity grew at 3.9 per cent. Manufacturing contracted by 1.5 per cent annually. Mole Hau, research analyst at BNP Paribas, says: “The sequential decline in production on the month was concentrated in the dominant manufacturing sector.” If one looks at the use-based industry segments, then the capital goods segment continues to wreak havoc. Capital goods production in September has fallen 12.2 per cent y-o-y and 10.2 per cent month-on-month.

What this implies is that the underlying momentum remains weak. Headline gross domestic product (GDP) is thus, likely to stay below six per cent levels in the second half, too. So, no positive uptick is likely in the second quarter GDP data.