India witnessed its biggest drop in industrial production yet, in March, with output crashing by 16.7 per cent as factories downed shutters towards the month-end owing to the Covid-19-induced nationwide lockdown. Economists, however, said the worst was yet to come after the weeks of suspension of industrial activity across sectors — many of which still remain hamstrung by a lack of labour, logistics, and raw materials.
Industrial output for fiscal 2019-20 contracted by 0.7 per cent compared with a growth rate of 3.8 per cent in 2018-19, official data released on Tuesday said. Industrial production had been tapering off since end-2019, but a rebound in February had pushed up the overall growth to a seven-month high of 4.6 per cent.
“For the year, metal products registered impressive growth with positive growth in apparel and food products. Otherwise it was quite lacklustre,” said Madan Sabnavis, chief economist, CARE Ratings.
The picture for April will be worse, with virtual nil growth in most sectors, he said, adding that only some segments like food and pharmaceuticals could possibly show positive growth.
Manufacturing hit badly
The month of March saw a broad-based slowdown across sectors. Manufacturing, which accounts for 78 per cent of the IIP, bore the biggest brunt, contracting by 20.6 per cent, after 3.06 per cent growth in the previous month. All the 23 sub-sectors within manufacturing posted year-on-year contraction.
The capital goods segment, which denotes investment in industry, contracted 35.6 per cent in March, following February's 9.7 per cent growth. Production in the category has remained in the red for a fourteenth straight month, despite the government’s efforts to open up even more sectors to easier foreign direct investment flows last year.
In line with their performance over the past few months, the automobiles and computer and hardware manufacturing segments saw the biggest levels of contraction. Motor vehicle production fell 49.5 per cent in March, after February's 15.6 per cent drop.
Similarly, production of electronics also reduced by more than 41 per cent, as compared with a 15 per cent decline in the previous month. Elsewhere, electrical equipment and machinery production shrank the fastest. The month saw electricity generation fall by 6.8 per cent after an 11.5 per cent rise in February. Mining output remained relatively unscathed in March after 9.6 per cent growth in February.
Consumer demand fizzles
Consumer durables was the biggest casualty of the lockdown among user-based industries, recording a 33 per cent fall in production. Even before the latest Covid-19 crisis, the data from the beginning of the year shows that production of consumer durables had continued to drop with March being the latest in a 10-month contraction spree.
"Unsurprisingly, the extent of contraction is the most severe in March 2020 in the case of capital goods and consumer durables, highlighting the pause in investment intentions and deferral of non-essential consumption. Even consumer non-durables, which include several essential items, witnessed a 16.2 per cent contraction in output in March 2020, as the lockdown interrupted production in several factories," said Aditi Nayar, principal economist at ICRA. Consumer non-durables had recorded zero growth in February after two consecutive months of contraction.
Nayar stressed that GDP growth was expected to slide to 2 per cent in the fourth quarter of FY20 from 4.7 per cent in the third quarter despite the anticipated improvement in agricultural GVA growth in that quarter. Overall, ICRA expects GDP growth to moderate to 4.3 per cent in 2019-20. Economists remain pessimistic about growth prospects for April.
"Any recovery in industrial production will only be gradual as the sector in the short to medium term will continue to struggle with sluggish demand, supply chain bottlenecks, raw material availability, labour issues and credit squeeze," said Rajani Sinha, Chief Economist & Head Research at Knight Frank India.