Factory output grew by just 1.3% in January despite favourable base

Omicron-led lockdowns across the country reduced demand for goods and services

India’s industrial activity escaped relatively unscathed from the third wave of Covid-19 in January registering no change in output sequentially even as Omicron-led restrictions across the country reduced demand for goods and services. However, the index of industrial production (IIP) grew in the low single digit when compared to the same month a year ago, helped by a favourable base.
 

Data released by the National Statistical Office (NSO) on Friday showed the IIP on the year-on-year (YoY) basis picked up marginally to 1.3 per cent in January from 0.7 per cent in the preceding month as manufacturing output grew 1.1 per cent. Mining and electricity outputs registered 2.8 per cent and 0.9 per cent growth respectively. However, when compared to December 2021, IIP did not grow in January as the index remained unchanged. Despite the dismal growth numbers, the index or output level in January remained higher than pre-pandemic levels.
 

However, the escalating geopolitical tension due to Russia's invasion of Ukraine and consequent rise in commodity prices have made India’s growth outlook uncertain. S&P Global Ratings, on Wednesday, cautioned that rising oil prices may dampen economic growth and cause a sizable current account deficit (CAD) in large energy-importing countries like India.
 

The ratings agency retained India’s economic growth at 7.8 per cent for financial year 2022-23 (FY23). It said that high inflation, weaker demand and increased uncertainty arising from the Russia-Ukraine conflict may slow the economic and fiscal recoveries much more than currently expected for many countries.
 

When oil and commodity prices harden, economic growth is impacted through first round and second round effects. With rising input costs, the margins of companies get squeezed, which gets directly reflected in the GDP growth as it is calculated on a value-added basis. If companies pass on the prices to the end user, then disposable income of consumers reduces, impacting overall consumer demand and, thus, the GDP growth. Secondly, with rising inflation, the Reserve Bank of India may increase interest rates, which may make borrowings expensive, adversely affecting both consumption and investment. If the government partly absorbs the rise in fuel prices, it may have an impact on its capex push, thus affecting growth momentum.
 

Sunil Kumar Sinha, principal economist, India Ratings and Research said as the geopolitical situation has the potential to turn into a major headwind for the economy, prescribing more policy support for ongoing industrial recovery. “Against this backdrop, India Ratings expects the IIP growth to be in low single digits in the near term, majorly driven by the favourable base effect,” he added.
  

Among used based industries of IIP, while capital goods, which is a proxy for investment demand and consumer durables, contracted 1.4 per cent and 3.3 per cent respectively in January, consumer non-durables expanded 2.1 per cent during the month.
 

Sinha said four consecutive months of negative growth in consumer durables as well as in capital goods is indicating that neither consumption demand nor the investment demand is showing any traction. “India Ratings and Research believes that high commodity prices, especially crude oil, will further dampen the consumption demand and also be a risk for the much-awaited revival of the private corporate investment cycle. However, except capital and consumer non-durables all the other used based industrial segments show higher output levels as compared to the pre-Covid-19 levels,” he added.
 

 Aditi Nayar, chief economist of ICRA, said despite the easing of restrictions after the subsiding of the third wave, high-frequency indicators point to a mixed trend in February.
 

“Manufacturing is unlikely to rise as much as the surge in the daily average goods and services tax e-way bill generation in February, especially given the weaker performance of the auto sector. With the modest uptick in electricity demand growth, amidst a dip in the YoY performance of Coal India Limited, we expect the IIP growth to remain sub-2% in February,” she said.