India’s Industrial Output Growth Falls To Five-Month Low In March

India's industrial activity slowed in March, after showing signs of sustained growth for four months, due to an unfavourable base effect and a broad-based slowdown in output of goods.

The index of industrial production rose 4.4 percent in March over a year ago, compared to a revised 7 percent growth in the previous month, according to data from the Ministry of Statistics. A Bloomberg poll of economists had projected a 6.2 percent growth in IIP. For financial year 2017-18, industrial output rose by 4.3 percent over the previous year.

Growth in factory output was the lowest since October last year. Since then IIP growth averaged 7.6 percent till February. The decline in March mainly reflects a slowdown in manufacturing as it contributes more than three-fourths to the index. The mining and electricity sectors, that had seen slower growth in previous months, saw modest improvement.

• Manufacturing sector growth fell to 4.4 percent in March from 8.5 percent in February
• Electricity generation grew 5.9 percent compared to 4.5 percent in February
• Mining activity rose 2.8 percent compared to a 0.4 percent degrowth in February

“The extent to which IIP growth faded in March 2018 was sharper-than-expected, driven by the deteriorating performance of capital goods, as well as modest sequential dips in the growth of the other categories except consumer non-durables,” said Aditi Nayar, principal economist at ICRA, in an emailed note. Consumer durables growth slipped to 2.9 percent. One reason for this was the gold jewellery segment, which contracted 66.5 percent in March.

Nayar said that the sharp contraction in gold jewellery output may have been a fallout of the near Rs 14,000-crore banking fraud involving diamantaire Nirav Modi that had come to light in February.

“Sustained contraction recorded from April 2017 to July 2017, suggests that capital goods may revert to displaying modest growth in the next few months,” she added.

The IIP slowdown tracked the core sector growth that has been losing steam, according to Crisil. The eight core sectors that make up about 40 percent of the total industrial production slowed to 4.1 percent in March from 6.1 percent in January. “Growth in the non-core sectors too slipped during the month. Separately, trade data reported a slowdown in non-oil exports in March,” Crisil said. “An unfavorable base effect was also behind the slowdown in IIP growth in March.”

Going forward, industrial output growth is expected to be better due to the forecast of a normal monsoon season, robust vehicle sales, the government's infrastructure focus and sector-specific programmes like housing for all, according to Devendra Kumar Pant, chief economist at India Ratings and Research. “Faster resolution of stressed assets of the banking sector and limiting fiscal slippage will be key factors to watch,” he said in an emailed note.

The IIP growth when seen together with the healthy earnings being reported by corporates “suggest a continued uptick” in gross value added growth for the fourth quarter despite the adverse impact of higher commodity prices on earnings, Nayar added.

Other Highlights

• Eleven out of the twenty three industry groups in the manufacturing sector have shown positive growth.
• Highest positive contributors to growth include digestive enzymes, electricity, sugar and mining.
• Highest negative contributors to growth were gold jewellery, generators and analgesic/anti-inflammatory API & formulations.