Industrial production in September contracted 4.3%, the sharpest decline since October 2011 spanning both the 2004-05 and 2011-12 series, official data showed on Monday. This reinforced fears of a deepening supply-side contraction in response to an acute demand compression in the economy, compounding worries of policymakers, as they seek ways to beat a seemingly entrenched economic slowdown.
All the three major sectors of the index of industrial production (IIP) - manufacturing, mining and electricity - shrank for the first time since November 2012. Five of the six use-based categories, barring intermediate goods, too, saw contraction. Importantly, the fall comes even when companies usually step up output to cater for festive demand.
Although a drop in the IIP was expected following the 5.2% plunge in the output of eight core infrastructure industries (which make up for 38% of the IIP) in September, the magnitude of the fall surprised analysts. Of course, floods in key states were partly to blame, especially for poor mining (Output of Coal India hit a six-year low in September), but IIP growth in October is expected to remain muted as well, thanks partly to an unfavourable base.
Having seen the worst contraction of 21.4% in the current IIP series (since April 2012) in August, capital goods output sh-rank again by as much as 20.7% in September and recorded its ninth straight month of fall.
This suggests a collapse in investments and an early revival is unlikely despite a massive corporate tax cut recently.
Given the deepening slowdown and the central bank's tilt towards growth, analysts expect the monetary policy committee to cut the repo rate again in December for a sixth time in 2019, since inflation is expected to remain within the RBI's target of 4%. The central bank had in October sharply cut its FY20 GDP growth forecast for the country by a sharp 80 basis points to 6.1%. But even this reduced forecast looks much too ambitious now, with some analysts now predicting a spill-over of the current weakness in the economy to the next fiscal as well.
The drop in consumer durables output just worsened to 9.9% in September, against 9.1% in August, indicating persisting weakness in urban demand. Importantly, even non-durables output shrank by 0.4% in September, the first contraction since November 2018 and compared with a rise of 3.1% in August this year, mirroring rural distress.
The growth in intermediate goods, a key driver of industrial production in recent months, stood at 7% in September, only a tad higher than the August level of 6.9% but sharply lower than the 14.7% witnessed in July. The contraction in infrastructure goods widened to 6.4% in September from 4.8% in the previous month, as a late withdrawal of monsoon and heavy downpour of rains hit construction activity.
Manufacturing shrank 3.9% in September, the worst performance in the current series. Mining crashed by 8.5% in September, the sharpest fall since May 2013, while electricity output contracted 2.6% against a fall of 0.9% in August.
Aditi Nayar, principal economist at ICRA, said lead indicators point to a continued weakness in October, which coupled with an unfavourable base effect, may "well result in a further deterioration (in the IIP) in the just-concluded month". "With incoming data pointing to continued weakness in the real sector, and GDP growth likely to slip in Q2FY20 from the multi-year low in Q1FY20, the likelihood of another rate cut in December has intensified, despite elevated CPI inflation," Nayar said.
According to DK Pant, chief economist at India Ratings, the economy is facing "a structural growth slowdown originating from declining household savings rate, and low agricultural growth". "Low agricultural growth is feeding into low agricultural and non-agricultural wage growth in rural areas, which is impacting rural demand adversely," Pant said.
Thanks to slowdown across key indicators, economists see no V-shaped recovery in GDP growth even after the second quarter, warning that any compression in the government's capital spending will hurt economic expansion.