India’s factory output hits 5-month low; slows to 4.4% in March

India’s industrial production grew at 4.4 percent in March, hitting a five-month low, owing to contraction in capital goods and relatively sluggish manufacturing output, as per data released by statistics office on Friday.

The factory output index growth rate has consistently been above 7 percent since November. It expanded to 7.1 percent in February while growing at the same pace of 4.4 percent a year ago –indicating an unfavourable base effect and pulling down the growth number for March, 2018.

Factory output measured by the index of industrial production (IIP) is the closest approximation for measuring economic activity in the country’s business landscape. The cumulative growth for the period April-March 2017-18 over the corresponding period of the previous year stands at 4.3 percent.

“March 2018 IIP growth at 4.4 percent although came in same as March 2017 growth, however declined sequentially from high growth during November 2017-February 2018. While mining and electricity output grew faster in March 2018 from February 2017, manufacturing output growth slowed down. One of the major reasons from slower output growth was unfavourable base effect of March 2017,” said Devendra Kumar Pant, Chief Economist at India Ratings.

Manufacturing sector, which accounts for more than three-fourths of the entire index, grew at a slower pace, rising 4.4 percent in March as compared with 8.7 percent in February and 3.3 percent a year ago. Nearly half of the total number of sectors covered under manufacturing, with a weight of around 30 percent in IIP, witnessed a negative growth.

Capital goods output, which is a proxy to measure private sector investment activity, hit a nine-month low and witnessed a contraction of (-) 1.8 percent in March. It soared 20 percent in February and 9.4 percent a year ago.

Consumer durables output increased 2.9 percent in March from 7.9 percent in February, while consumer non-durables saw a sharp jump of 10.9 percent in March as compared with 7.4 percent in February and 7.5 percent a year ago.

According to Aditi Nayar, Economist at ICRA, the sharp contraction in output of gold jewellery could be a fallout of the fraud that had come to light in February, which contributed to the flagging growth of consumer durables in March.

“The uptick in the expansion of consumer non-durables to 10.9 percent  in March, 2018 from 7.3 percent in February, 2018 can be partly attributed to the performance of sugar (to 78.2 percent from the initial 60.1 percent), which has a weight of approximately 5 percent in that sub-sector,” Nayar said.

Electricity production grew 5.9 percent in March from 4.5 percent in February, and 6.2 percent a year ago, while mining activity grew at 2.8 percent from a contraction of (-) 0.3 percent in February and 10.1 percent jump a year ago.​

Going forward, Pant believes that output growth in 2018-19 is likely to be better than the last financial year, due to expectation of a normal monsoon, robust vehicle sales, focus on infrastructure and sector specific government schemes such as such as Housing for All.

“Faster resolution of stressed assets of banking sector and limiting fiscal slippage will be key factors to watch,” Pant said.

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