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Monday, September 28, 2020

More signs of distress: Over 10% contraction in July factory output

The National Statistical Office data, however, recorded a sequential improvement from 15.8 per cent contraction seen in June, reflecting some resumption in industrial activity with the lifting of lockdown restrictions.

By: ENS Economic Bureau | New Delhi | Updated: September 12, 2020 8:06:14 am
Apart from the phonemakers, nearly 40 electronic component manufacturers had also applied to set up new units or expand existing plants under the PLI scheme. (File)

Factory output continued to decline for the fifth consecutive month in July, posting a contraction of 10.4 per cent, mainly due to degrowth in manufacturing, mining, capital goods, and consumer durables output, data released by the National Statistical Office (NSO) on Friday showed.

The data, however, recorded a sequential improvement from 15.8 per cent contraction seen in June, reflecting some resumption in industrial activity with the lifting of lockdown restrictions.

Cumulatively, the Index of Industrial Production (IIP) contracted by 29.2 per cent for April-July against a growth of 3.5 per cent in the same period last year. The IIP had grown by 4.9 per cent in July last year.

The decline in industrial growth mirrors the trend in other high frequency indicators for July, with economists saying the recovery process will take time as the rate of growth of economic indicators had turned flat in July and August.

India’s Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, had stood at 46 in July compared with 47.2 in June. A print below 50 signifies a contraction.

With a negative IIP print for July, which is the first month of the second quarter, this will also reflect in the expected contraction in the Gross Domestic Product (GDP) growth numbers for the July-September quarter. India’s GDP growth contracted by 23.9 per cent in the April-June quarter, the worst among G20 countries.

“…The data show that the sharp recovery witnessed in the month of May and June is now becoming somewhat flattish. Part of the reason is local/partial/weekend lockdowns imposed in many parts of the country, often without much advance intimation. This is not allowing orderly recovery of economic activities,” Sunil Kumar Sinha, Principal Economist, India Ratings, said.

“The declining trend in contraction in manufacture of textile and manufacture of wearing apparel, important from the employment perspective, augurs well for the economy,” Sinha said. “Despite these isolated but encouraging trends, Ind-Ra believes the process of industrial recovery well take a while and require sustained policy support.”

Barring consumer non-durables, a proxy for fast moving consumer goods (FMCG) that posted a positive growth of 6.7 per cent, all other sectors including manufacturing, mining, primary goods, capital goods contracted in July.

The manufacturing sector, which has a weight of 77.6 per cent in IIP, contracted by 11.1 per cent in July from a contraction of 16.0 per cent in June. Output of consumer durables fell 23.6 per cent in July as against a decline of 34.3 per cent the previous month. Production of capital goods, a proxy for investments, fell 22.8 per cent in July as against a decline of 37.4 per cent in the previous month.

Electricity output recorded the best sequential improvement and may turn out to be the first sector, apart from consumer non-durables, to find its way in positive territory going ahead. In July, electricity output contracted by 2.5 per cent as against a double-digit contraction of 10.0 per cent seen in the previous month.

Rajani Sinha, Chief Economist & National Director – Research, Knight Frank India, said: “Going forward, we will continue to see improvement in segments like consumer non-durables including the pharma segment. However, a sustained improvement in other components like consumer durables and capital goods will require consumer and business sentiments to improve. This in turn will depend on how much time it takes to control the spread of infection in the country. Any further meaningful stimulus measures by the government will also be supportive of sentiments and economic growth.”

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