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Factories failed to deliver the goods in November

Asit Ranjan Mishra
India’s industrial growth, measured by index of industrial production (IIP) slowed to a seventeen-month low of 0.7% amid slump in manufacturing

New Delhi: India's factory output growth crashed to its slowest in 17 months at 0.5% in November, the outcome of an unfavourable base effect as well as contraction in manufacturing. The previous low was in June 2017, when IIP growth fell to -0.2%. The index of industrial production (IIP), announced by the Central Statistics Office on Friday, is the last set of key economic data to be released before the interim budget is presented on 1 February.

Manufacturing production shrank 0.4%, while electricity and mining output grew 5.1% and 2.7%, respectively. Items that recorded the steepest contraction included television sets; bodies of trucks and trailers; and raw materials for drugs.

After the initial turbulence following the introduction of the goods and services tax (GST) in July 2017, when factories reduced their stocks, growth in the IIP recovered in November that year to hit a robust 8.5% as factories restocked during the festive season. This acted as a negative base for the November IIP growth in 2018.

The unfavourable base effect, as reported in the data released on Friday, is unlikely to be a one-off. Average IIP growth in the second half (October-March) of the last financial year, at 6.1%, was much higher than the first half (April-September) at 2.6%.

This narrative gels with the gross domestic product (GDP) data released by the CSO on Monday, which showed the Indian economy is headed for a slowdown in the second half of the year ending 31 March with the federal statistics body projecting an overall economic growth of 7.2% for 2018-19.

With the economy already recording a 7.6% GDP growth in the first half of the current fiscal, this implies growth is likely to slow at around 6.8% in the second half.

In addition, growth so far in 2018-19 has been driven by government spending on infrastructure. Sustaining this may be a challenge as the government is likely to cut back on capital expenditure to meet the fiscal deficit target which stands at 112% of its full-year target in the eight months till November.

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However, slower-than-expected economic growth projection and a benign inflation scenario may force RBI under its new governor Shaktikanta Das to change its stance and cut rates to support growth.

Das, who took charge last month, said at his first press conference that inflation remained within RBI's target and its outlook was benign. “But we need to be watchful,” he said, ahead of the next policy meeting in February.

Retail inflation slowed to 2.33% in November, below the central bank's projection, from 3.38% a month ago.

Principal economic adviser in the finance ministry Sanjeev Sanyal in an interview last month said RBI needs to structurally reduce interest rates as the government has anchored inflation to a lower level.

With oil prices falling more than 30% from recent highs, an impending global slowdown, and higher oil production in the US, analysts expect the upside to oil price rises to have been capped.

According to Shubhada Rao, chief economist at Yes Bank Ltd, while the adverse base and post-festive season winding down of momentum along with fewer working days had been expected to lower IIP growth, the magnitude of the correction has been sharper than expected.

“Tighter domestic financing conditions may also have played a part. Going forward, incrementally improving liquidity, normalization post festive-related disruptions and election-related spending could get growth supportive enabling higher prints versus today's IIP number. However H2 average growth will be lower than H1, as also corroborated by advance estimates of GDP,” she added.

B. Prasanna, head, Global Markets Group at ICICI Bank, said he expects GDP growth in the third and fourth quarter to be well below 7% , taking the full year estimate to around 7.2%. “If economic activity continues to stay soft then inflation pressures could also see some easing thereby increasing expectations of accommodation in the next monetary policy meeting,” he added.