Weak industrial output, high inflation pose tough challenge for next govt

IIP contracts by 0.1% in FY14, 0.5% in March.

Industrial production shrank 0.1 per cent during the last financial year as mining and manufacturing sectors continued to be a drag on the overall output throughout the year.

According to the index of industrial production (IIP) data released on Monday, production in the mining and manufacturing sectors contracted 0.8 per cent during FY14. In March, the index shrank 0.5 per cent year-on-year due to abysmal performance by these two sectors. The development adds to the challenge for the new government, which will have to battle subdued investment sentiments, lower exports growth and overall slowdown in the economy.

Economists said that while the development is hardly a surprise, a pick-up in investment activity is unlikely until the second half of the current fiscal. “The industrial contraction in March was largely in line with our expectations, given the subdued core sector growth and contraction in overall merchandise exports… A pickup in investment activity is unlikely to take root until H2FY15, acting as a drag on overall manufacturing growth. Moreover, with a repo rate cut highly improbable in 2014, interest rates would remain sticky and limit the improvement in consumption sentiments,” Aditi Nayar, senior economist, ICRA, said.

The power sector was the only saving grace with electricity generation clocking a growth of 6.1 per cent during the last fiscal as against 4 per cent growth during FY13. However, Nayar said that the healthy reservoir levels at present with reference to the year-ago period notwithstanding, the possibility of sub-par monsoon rainfall would act as a dampener on hydroelectricity generation in FY15.

Adding to falling investment demand woes is declining consumption demand. During the year, consumer durables declined 12.2 per cent while overall growth in consumer goods stood at 2.6 per cent. Capital goods production, a barometer of investment, also shrank 4 per cent as against a contraction of 6 per cent in FY13.

However, consumer non-durables grew 5.2 per cent in FY14 as against 2.8 per cent during the year ago period. It grew 7.2 per cent during March. “The uptick in consumer non-durables during the month is likely to have been led by a revival in exports of yarn, textiles, apparels, which may sustain in the ongoing quarter,” Nayar said.

Of the 22 industries, 12 industry groups in the manufacturing sector showed negative growth during March lead by radio, TV and communication equipment and apparatus, office, accounting and computing machinery; medical, precision and optical instruments, watches and clocks, aluminium conductor and woolen carpets.

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Industry groups such as wearing apparel; dressing and dyeing of fur; basic metals and food products and beverages, on the other hand, showed the highest positive growth.