Industrial production contracts by 35% in May, but manufacturing shows signs of revival

Index of Industrial Production figures for May are an improvement over the 58% contraction in April, the first full month of the nationwide Covid-19 lockdown.

A worker at a utensil factory in Jammu in May (representative image) | Photo: ANI

New Delhi: India’s index of industrial production (IIP) contracted by 35 per cent in May on account of a limited resumption in manufacturing activity in the month.

However, this was marginal improvement from April — revised data for the month showed a 58 per cent contraction in the IIP, as against the initially reported 55 per cent.

Data released by the Ministry of Statistics and Programme Implementation showed that manufacturing contracted by 39 per cent in May, as against 67 per cent in April. Mining contracted by 21 per cent in May, a marginal improvement from 27 per cent shrinkage in April. Electricity production contracted by 15 per cent in May as against 23 per cent in April.

The ministry, however, reiterated its April note, saying that the May IIP numbers are not comparable to pre-pandemic numbers.

“As mentioned in the press release for the IIP for April 2020, it may not be appropriate to compare the IIP for May 2020 with those of months preceding the Covid-19 pandemic,” it stated.

“In view of the preventive measures and announcement of nationwide lockdown by the government to contain the spread of Covid-19 pandemic, a majority of the industrial sector establishments were not operating from the end of March,” the government said in its statement, adding this had an impact on the items being produced by the establishments during the lockdown and the subsequent periods of conditional relaxation in restrictions.

Some manufacturing units located in green zones or areas where there were no fresh cases were allowed to resume production in May after a complete nationwide shutdown in April. With the ‘unlock’ phase beginning 1 June, the IIP numbers are expected to further improve.

The Indian economy is expected to contract by more than 40 per cent in the first quarter of 2020-21 as financial year began with the two-month lockdown where nearly all economic activity came a halt. Economists expect a gradual recovery in the second half of the financial year, but despite this, the economy is expected to contract by 5-12 per cent for the whole year.

Challenge to revive demand

The May IIP data also reveals the challenge for the government to revive demand. The consumer durables segment continued its sharp contraction, declining by 68 per cent during the month, as against 96 per cent in April. The consumer non-durables segment with many essential items remained one of the resilient segments, declining only by 12 per cent.

Investment demand, as reflected by capital goods production, declined 64 per cent during May as against a contraction of 93 per cent in April. Infrastructure or construction goods also showed a sharp improvement with the contraction halving to 42 per cent in the month.

Aditi Nayar, principal economist at ICRA, said the data shows that economic activity hit a trough in April 2020, and will show 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,” Nayar said in a note.

“..Pent up demand, especially for items that are now considered to be essential under the new normal of work from home, would lead to a temporary uptick in production and sales of certain categories of small to mid-ticket consumer durables in the initial unlock period, which may not sustain subsequently,” she said.