IIP output contracts 0.1% in June; hits four-year low

Growth of capital goods continued to fall, down 6.8%

Industrial output in the country slipped into negative territory in June, dragged down by a contraction in manufacturing, apart from an unabated fall in capital goods.

Figures for the Index of Industrial Production (IIP), released by the government on Friday, showed national factory output contracting by 0.1 per cent, a 48-month low, as compared to the 2.7 per cent rise seen in the previous month of May.

The index had earlier fallen by a wider margin, of one per cent, in June 2013. The fall was primarily because of the manufacturing sector, more than three-fourth of the IIP, falling in June by 0.4 per cent after a 2.6 per cent rise in May. In manufacturing, 15 of the 23 sub-groups recorded a contraction. “Unsurprisingly, the unfavourable base effect, reduction in inventories ahead of the transition to the goods and services tax (GST), and slide in growth of non-oil exports culminated in the IIP's marginal contraction,” said Aditi Nayar, principal economist at ratings agency ICRA.

Cumulative growth of factory output for April-June, first three months of the current financial year, was two per cent. Much lower as compared to the cumulative growth of 7.1 per cent during the corresponding period of 2016-17. While the other sectors within IIP managed positive growth, it remained muted for both mining (0.4 per cent), dampened by reduction in coal output, and electricity (2.1 per cent). The corresponding figure for May was 0.19 per cent for mining and a healthy 8.28 per cent for electricity.

However, the volatile capital goods segment, generally taken as an indicator of industrial activity, continued to fall, by 6.8 per cent in June, after the May fall of 1.38 per cent. Among the other use-based categories, apart from consumer non-durables which rose by 4.9 per cent, all others fell in June. Consumer durables fell 2.1 per cent, solidifying the view that consumer demand is still lagging. 

“Within the IIP, metals and automobiles are the only non-consumer segments that have grown. Some government activity in infrastructure could be the main driving force. Pharmaceuticals and furniture are the other growth centres,” said Madan Sabnavis, chief economist at CARE Ratings. “A significant part of this release is the fairly high revision in the May growth number, which one would not have expected, as the new IIP was to be an improvement  in terms of data collection.”

The June data represents the last month before GST was implemented, from July 1. It is also the fourth instance of IIP being calculated under the new updated base of 2011-12. “Notwithstanding the favourable base effect and the rebuilding of inventories post-GST, we expect IIP growth to trail the 5.2 per cent rise in July 2016,” Nayar said regarding the July figures, to be released next month.