New Delhi: A sharp fall in factory output in September, led by a contraction in manufacturing, electricity and mining, is likely to push second quarter gross domestic product (GDP) growth numbers below 5 per cent, economists have said.
Data released by the government Monday showed that the Index of Industrial Production (IIP) contracted by 4.3 per cent in September, following a 1.4 per cent contraction in August. The IIP had risen 4.6 per cent in September 2018.
The factory output growth numbers are also the lowest since the adoption of 2011-12 as the base year. The previous contraction of this magnitude was seen in October 2011, when the 2004-05 base was operational.
The government will release the GDP numbers for the quarter ending September on 29 November.
The number is keenly awaited after growth in the April-June quarter fell to a six-year low of 5 per cent, dragged down by weak consumption demand and investment levels.
While the mining sector contracted for the first time in nine months, by 8.5 per cent, the manufacturing and electricity sectors contracted for the second consecutive month by 3.9 per cent and 2.6 per cent, respectively.
Classification of output based on use also presented an alarming picture.
Capital goods — a key measure of the investment demand in the economy — contracted for the ninth consecutive month by 20.7 per cent, while primary goods contracted by 5.1 per cent for the first time in nine months.
The consumer durables segment contracted for the fourth consecutive month, by 9.9 per cent, while consumer non-durables contracted marginally for the first time in months, reflecting weak consumer demand.
Intermediate goods was the only segment that grew in September.
Devendra Kumar Pant, chief economist and senior director of public finance at India Ratings & Research, said this is the first time since November 2012 that all three broad-based sectors have contracted.
“Moreover, IIP growth in October 2019 is also likely to be in negative territory, and only after November can one expect mild IIP expansion,” he added.
Pant pointed out that although gross value added (GVA, a way to measure growth of different sectors in the economy) and IIP measure two different data points, and industrial GVA growth has generally been in excess of IIP growth, the industrial GVA growth in the July-September quarter is likely to be lower than the 2.7 per cent achieved in the April-June quarter.
Care Ratings, meanwhile, said in a note that the numbers reflecting weakness in industrial activity in the economy have been weighed down by the weak investment climate and consumer demand conditions.
The agency pointed out that 17 of 23 industries contracted, reflecting subdued demand.
Economists expect the Reserve Bank of India to continue with its accommodative policy to support flailing growth and expect another rate cut in the December monetary policy announcement.
“The Indian economy is currently facing a structural growth slowdown originating from declining household savings rate, and low agricultural growth,” Pant said.
“Low agricultural growth is feeding into low agricultural and non-agricultural wage growth in rural areas, which is impacting rural demand adversely,” he said, adding that the RBI will continue with its accommodative policy.