October IIP lowest in more than a year: Why has industrial output declined?

A contraction was recorded for capital goods output — a proxy for investment sentiment — after a gap of nine months at (-) 2.3 per cent, indicating weak investment. Consumer durables and consumer non-durables output — an indicator of fast-moving consumer goods — also continued to be in negative territory at (-) 15.3 per cent and (-) 13.4 per cent respectively, reflecting weak consumption demand, especially in rural areas.

But why has manufacturing contracted?

Weaker global demand is reflecting on India’s merchandise exports, which is in turn showing up as a decline in manufacturing output. The trend is in line with a 4.3 per cent contraction registered in manufacturing output seen in the overall GDP data for July-September quarter.

The maximum decline in industrial output for October was seen for clothing, electrical equipment, textiles, pharmaceuticals, and leather and related products, with most of these sectors having a large export share and production concentrated in the small and medium enterprises (SMEs) segment.

Merchandise exports contracted by 12.1 per cent in October after expanding during the previous 19 months. Merchandise imports rose by 10 per cent in October.

Much of the performance of the manufacturing sector is predicated on the interplay between the organised corporate sector and unorganised SME (small and medium enterprises) segments, with a faltering export performance and continuing struggle of SMEs acting as headwinds.

On the other hand, manufacturing activity, as measured by the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) has recorded expansion for 17 straight months, rising to 55.7 in November from 55.3 in October, which is being seen more as an indicator of better performance by large manufacturing firms.

Does the latest print run counter the government and RBI projections?

Last week, the Reserve Bank of India while announcing a rate hike of 35 basis points to 6.25 per cent in a bid to rein in retail inflation, said the external sector has been affected by global headwinds. “The external sector has been affected by strong global headwinds. Slowing global demand is weighing on our merchandise exports. The growth of merchandise imports is also decelerating,” RBI Governor Shaktikanta Das said.

The impact of rate hikes by the RBI is also being seen as one of the dampeners on industrial activity. The RBI has raised rates by a cumulative 225 bps since the start of the tightening cycle in April 2022.

Headline retail inflation rate, which had remained above the RBI’s upper tolerance level of 6 per cent for ten months, slipped to an 11-month low of 5.88 per cent. Core inflation, which is the non-food, non-fuel segment, however, has remained high. The average core inflation for the September-November was recorded at 6.03 per cent as against 5.85 per cent in the previous quarter.

After the release of the GDP data on November 30, Chief Economic Advisor V Anantha Nageswaran had said that the Indian economy is on track to grow 6.8-7 per cent in the current fiscal and the manufacturing sector will see a rebound due to steady demand.

“The festival season was quite strong. Therefore, you will see a rebound in the numbers in the third quarter of the fiscal year…there was probably a bit of a caution ahead of the festival season, manufacturers were probably reluctant to add too much to the inventory. Now that they have had a strong festive season and they are seeing that overall demand remains steady, manufacturing sector outcomes should start to improve in the coming quarters,” he said.