Industrial output at 4.5% in Feb, may shrink in March over Covid-19 crisis

A rebound in manufacturing activity pulled up February’s overall industrial output, helping it to grow to a seven-month high of 4.5 per cent, up from January’s 2 per cent. However, the sudden growth came amid worries of growth tapering off in the following months due to the coronavirus disease (Covid-19) outbreak.

The rise in the Index of Industrial Production (IIP) helped pull up cumulative growth in industrial output to 0.9 per cent in the April-February period of 2019-20, the data released on Thursday showed. This was still much lower than the 4 per cent growth in industrial production seen in the same period of the previous year.

Broad-based slowdown across sectors has meant that output had contracted in four of the 11 months till February.

However, manufacturing output rose 3.2 per cent in February, up from 1.62 per cent in the previous month. The sector accounts for 78 per cent of the index. Moreover, the month saw both mining production and electricity generation shooting up by 10 per cent and 8.1 per cent, respectively, giving industrial output a steady boost.

Lull before storm

Of the 23 sub-sectors within manufacturing, 10 recorded year-on-year contraction. However, economists suggested this was expected to go down steeply in the coming months.

“Industrial growth recorded a broad-based and sharper-than-expected pick-up to a seven-month high of 4.5 per cent in February 2020, suggesting that some parts of the economy were on the path of a gradual revival prior to the escalation of the Covid-19 outbreak. However, the solace provided by this is hollow, as social distancing and lockdowns are likely to result in considerable industrial contraction in March 2020, particularly in manufacturing and electricity, which would likely intensify in April 2020,” said Aditi Nayar, principal economist, ICRA.

Most importantly, the capital goods segment denoting investment in industry contracted 9.7 per cent in February. The pace of fall was more than double that of January, when it had been 4.2 per cent.

Production in the category remained in the red for the 13th straight month, despite government efforts to open up even more sectors to easier foreign direct investment flows last year.

The IIP database showed that contraction remained entrenched across automobile segments, with motor vehicle production falling 15.6 per cent in February, higher than the 10.6 per cent fall in January.

Similarly, production of electronics also reduced by almost 15 per cent in the latest month — higher than the 11.6-per cent fall in the previous month. This comes after the government-ordered rejig of its incentives for domestic production in the sector through an update of the phased manufacturing programme, aimed at reducing imports of electronics goods. But production rise has been slow. Case in point, printed circuit board production took a hard knock in February.

On the other hand, steel and auto components like vehicle axles, were flagged by the government as sectors pulling down overall IIP growth. Machinery production shrank 6.9 per cent after growing by 1.2 per cent in the previous month.

Consumer demand fizzles

Even before the latest Covid-19 crisis, the data from the beginning of the year shows that production of consumer durables had continued to drop. February marked the ninth consecutive month when production had fallen. Contraction was more pronounced at 6.4 per cent, after January’s 4 per cent fall. This reflected low consumption demand, a trend which had remained in place since the festive season in October-November, said Madan Sabnavis, chief economist at CARE Ratings.

Crucially, the consumer non-durables category recorded zero growth in February, after two consecutive months of contraction.

Economists remained pessimistic on growth prospects for March. While Nayar expected gross domestic product to contract 4.5 per cent in first quarter of 2020-21, Sabnavis stressed that the shutdown negated the March-end phenomenon of companies pushing production to meet targets.