India's Dec factory output growth at 10-mth low of 0.4% on Covid disruption

Manufacturing output contracted 0.1% while mining and electricity grew at 2.6% and 2.8%, respectively

India’s factory output growth decelerated to its lowest in 10 months to 0.4 per cent in December amid Omicron-led restrictions, signaling that the economic recovery in Asia’s third-largest economy remains fragile.  

The data released by the statistics department on Friday showed that manufacturing activity contracted by 0.1 per cent during the month, while mining and electricity output grew at 2.6 per cent and 2.8 per cent, respectively.

The output of capital goods, an indicator of investment demand in the economy, contracted for the third consecutive month, while the output of consumer durables remained in contractionary territory for the fourth straight month. Consumer non-durables growth slipped into negative zone in December after two months of expansion. Despite the easing of weather-related disruptions in South India, the pace of growth of infrastructure/construction goods moderated to 1.7 per cent in December from 3.1 per cent in the preceding month.

The Reserve Bank of India’s (RBI’s) latest quarterly Industrial Outlook Survey of the Manufacturing Sector, released on Thursday, showed that capacity utilisation is expected to decline to 52.6 per cent in the March quarter from 65.2 per cent in the December quarter, with the overall business situation also projected to decline during the period. A separate bi-monthly RBI survey showed that consumer confidence continued to remain in negative territory even as it improved marginally between November and January, while sentiment regarding the situation a year from now deteriorated.

Sunil Kumar Sinha, principal economist at India Ratings and Research, said the lacklustre IIP growth puts a question mark on the current recovery. “Successive monthly data of industrial output is making it abundantly clear that consumption demand will need more attention from policymakers if recovery is to become sustainable. Also, the continued weakness in capital goods does not augur well. Although there are indications that finally private corporate investment is picking up, the same has yet to find a reflection in the IIP data,” he said. 

States imposed mini-lockdowns and mobility restrictions starting late December and tightened them further during January, as the Omicron variant spread across the country. High-frequency indicators such as PMI manufacturing fell to a four-month low in January, showing further weakness from the December level.

However, Aditi Nayar, chief economist at ICRA Ltd, said she expects the IIP to grow by 1-2 per cent in January as the base effect eases. “Unlike the adverse impact on contact-intensive services and mobility, the third wave has not been hugely disruptive for the industrial sector in January 2022, as evidenced by the mild sequential decline in the monthly average generation of GST e-way bills, and rise in electricity and Coal India’s output,” she added.  

The Monetary Policy Committee of the Reserve Bank of India on Thursday kept key policy rates unchanged, contrary to expectations of a hike in the reverse repo rate, flagging the need to revive and sustain growth on a durable basis.