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It would be an understatement to say India's factory output has plummeted over the last one year. But has it hit rock bottom? There are no clear answers to this question, as a lot depends on how the policy logjam is broken. Industrial output for FY13 has grown at an anaemic 1.2 per cent, against estimates of two per cent growth at the start of the year.
The cumulative industrial output for FY12 grew at three per cent. Be it mining, manufacturing or electricity, output across sectors has either contracted or halved compared to the previous year. On a month-on-month basis, too, industrial production contracted 1.6 per cent in March, if one looks at a seasonally adjusted figure. According to Sonal Varma of Nomura, this indicates the pick-up was largely due to a positive base effect, even as the underlying trend remained weak.
The weakness is broad-based across sectors. Capital goods and consumer goods, the two segments which provide backward linkages to the rest of industry, have grown at a worryingly low pace through FY13. Capital goods contracted 6.3 per cent in FY13, compared to the four per cent contraction seen in FY12.
Manufacturing also posted a weak performance and grew 1.2 per cent in FY13, compared to the three per cent growth seen in FY12. The weak 1.2 per cent growth clocked by the manufacturing sector, which has a three-quarter weight on the Index of Industrial Production, is most worrying. With consumption collapsing over the last couple of quarters, manufacturing has been severely hit, as have mining and electricity.
Manufacturing's contribution to GDP stands at 15.2 per cent in FY13, which the government wants to take to 25 per cent by 2022. Given the policy logjam, this seems a tall order, economists believe. According to CRISIL Research, the current situation is reminiscent of the crisis year of 1991-92 when industrial output grew a mere 0.6 per cent, while manufacturing output contracted 0.8 per cent. This trend in manufacturing isn't a recent phenomenon. Manufacturing growth has continued to be below trend for the last several years.
Weak factory data has implications for economic growth as well. The Advanced National Accounts Estimates released by the Central Statistics Office had estimated the industry would grow two per cent in FY13 and the actual print of one per cent is well below expectations. Factoring in the industrial growth, CARE Ratings says, GDP is likely to grow 4.8 per cent in FY13, assuming ceteris paribus conditions for other sectors. While most economists believe industrial activity would pick up in FY14, a lot depends on the measures the government takes to break the policy logjam in sectors like mining and electricity.
