As per the Index of Industrial Production (IIP), factory output contracted 4.3% in September, the lowest in almost eight years in this series, which began April 2012 (with 2011-12 as the base year) and the lowest since October 2011when compared with the earlier series with base year 2004-05. IIP had contracted 5% in October 2011.
The decline was steeper than the 1.4% reduction seen in August, suggesting that the economy may have slumped further in the second quarter of the current financial year. Industrial production grew 4.6% in September 2018.
Economists expect second-quarter growth — the GDP figure is to be released on November 29 — may be lower than the six-year low of 5% in the June quarter. The Reserve Bank of India (RBI) had said last month that growth may be marginally better at 5.3% in the July-September period.
“This is a weak phase in the economy and sentiments are not robust but it’s tough to say if the economy has bottomed out,” said IDFC First Bank chief economist Indranil Pan. The lender sees second-quarter growth at 4.9-5.1%.
The central bank has pared its FY20 annual growth forecast to 6.1% from 6.8% estimated earlier. The economy grew 6.8% in FY19.
Full year growth estimates
Economists’ estimates for the full year are generally more gloomy. Growth for the current fiscal year may dip to around 4.7%, dragged down by the industrial sector, said ICRA principal economist Aditi Nayar. Nomura cut its GDP forecast to 4.9% for FY20 from 5.7% earlier. Axis Bank chief economist Saugata Bhattacharya said, “Overall, Q2 GDP growth is likely to be weak and robust recovery will take some time.”
The RBI has cut interest rates by a cumulative 135 basis points this year and will review monetary policy early next month, with the announcement scheduled for December 5. One basis point is one-hundredth of a percentage point.
Last week, Moody’s Investor Service lowered its outlook on India’s sovereign rating (Baa2) to negative from stable, saying that the domestic economic downturn could be structural, as opposed to cyclical, implying that more policy changes were needed in order to revive growth.
The statistics office revised the contraction to 1.4% in August from 1.1% earlier. India’s core sector output contracted 5.2% in September, posting its worst performance in 14 years.
“The Indian economy is presently facing a structural growth slowdown originating from declining household savings rate and low agricultural growth,” said Devendra Kumar Pant, chief economist, India Ratings. April-September factory output growth at 1.3% was well below 5.2% for the same period in the last fiscal.
Society of Indian Automobile Manufacturers (SIAM) data showed passenger vehicle sales in the country rose marginally by 0.28% in October, breaking an 11-month streak of declines, driven by festive buying amid deep discounts. However, those of cars dropped 6.34%.
CARE Ratings said that in order to attain 4% growth for FY20, industrial output would need to grow at an average 6-6.5% in the second half of the year.
Independent experts were doubtful about the prospects of an immediate recovery but expect a 25 basis point rate cut next month.
Consumer demand has not picked up, said CARE Ratings chief economist Madan Sabnavis. Both consumer durable and capital goods, key growth engines, are negative both for September and the six-month period since April.
Production of capital goods, an indicator of investment activity, shrank 20.7% in September.
“The contraction was steeper than we expected,” said Bhattacharya. “While the slowdown is broadbased, including FMCG consumption demand, the largest contributor was mining, the proximate reason being the excess rains this year in the coal and mineral mining belts.”
Pan said there could be a turnaround from here on in. “However, the extent of that is not known,” he said.
Mining output shrank 8.5% in September while electricity generation contracted 2.6% in the month.
Production of consumer durables contracted 9.9% in September and that of consumer non-durables was down 0.4%. Production of primary goods shrank 5.1% while that of intermediate goods rose 7%. In all, 17 out of 23 industry groups reported positive growth.
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