Industrial output continues decline in May; govt withholds headline number

All the components of the IIP - mining, manufacturing and electricity - saw contraction on a smaller magnitude as compared to the previous month

India’s industrial production contracted for the third consecutive month in May, shrinking 34.7 per cent, after a historic fall of 57.6 per cent in April as the Covid-19-induced lockdown almost froze economic activities. However, the Index of Industrial Production (IIP) had begun shrinking even before, falling by 18.3 per cent in March, which saw only seven days of shutdown.

With the lockdown in force for most of April and May, the government on Friday again released only index numbers for industrial production, and the numbers cited above are derived from those.

The government clarified that after reporting zero production in April, subsequent periods of conditional relaxations led to a graded pick-up in industrial activity. However, experts cautioned against celebrating just yet.

“The IIP data for May confirms our conviction that economic activity hit a trough in April, and will record an uneven recovery in the subsequent months. However, the rising infections and imposition of localised lockdowns in many states, are raising red flags about the pace of normalisation that we should expect in the ongoing quarter. Economic activity is likely to tread a bumpy path in the coming months, in our view,” said Aditi Nayar, principal economist at ICRA. All the components of the IIP — mining, manufacturing, and electricity — saw contraction, albeit at a smaller magnitude, than the previous month.

All the components of the IIP — mining, manufacturing, and electricity — saw contraction, albeit at a smaller magnitude, than the previous month. Manufacturing, which accounts for 78 per cent of the IIP, saw output fall 39.3 per cent in May, after a massive 67.1 per cent drop in the previous month. Inherent stress in the sector had become visible since March, when output had fallen by 22.4 per cent.

“Quite clearly the lockdown and limited opening up affected production of all industries. Different state rules on transport and labour further exacerbated the situation. While non-essential goods were permitted for production, challenges remained in logistics and labour,” said Madan Sabnavis, chief economist at CARE Ratings.

All but one of the 23 sub-sectors within manufacturing posted a year-on-year contraction. Buoyed by drug exports and orders for sanitizers and protective gear, pharmaceutical production saw 2.45 per cent growth. The capital goods segment, which denotes investment in industry, contracted by 64.3 per cent after falling over 90 per cent in April. With this, production in the category saw its sixteenth consecutive monthly decline. Policymakers fear that as the government has exhausted its options of opening up even more sectors by easing foreign direct investment flows, capital goods production might take time to recover.

Consumer demand missing

Consumer durables was a major casualty of the lockdown in user-based industries, recording a 68.5 per cent fall in production after April’s near absolute 98 per cent drop. Data from the beginning of the year showed that production of consumer durables was falling even before the Covid-19 crisis, with March being the tenth month of contraction. Consumer non-durables, which include many essential items, saw the narrowest contraction of 11.7 per cent after a near 50-per cent fall in April.

Among user-based industries, the biggest pick-up was witnessed in infrastructure goods. The contraction in the segment halved to 42 per cent in May, down from 84.7 per cent in April, driven by cement and steel.

Mining activity also fell by 21 per cent, after April’s 27 per cent fall. Meanwhile, electricity generation continued to see a lower decline at 15 per cent, down from the already modest 22 per cent fall in April, as domestic demand shot up.