Slow demand shrinks March factory output

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actory output remained in the negative territory for the second month in a row in March, contracting 0.5 per cent on weak consumer demand and slow capital investment. The index of industrial production (IIP) stood at 3.5 per cent in March 2013.

That wrapped up a sluggish financial year, which saw a 0.1 per cent contraction in industrial production compared with 1.1 per cent growth in the previous year.

The Central Statistical Organisation (CSO), which releases the IIP, however revised the February industrial output data marginally upwards to 1.8 per cent contraction from 1.9 per cent.

Icra senior economist Aditi Nayar said the industrial contraction in March was largely in line with expectations, given the subdued core sector growth and a contraction in overall merchandise exports.

A revival in exports of yarn, textiles and apparels may have led to an uptick in production of consumer non-durables in March compared with the previous month and this trend may sustain in the ongoing quarter.

Notwithstanding the easing of contraction in the capital goods sector in March compared with that in February, investment activity remained sluggish with no visible sign of a broadbased turnaround in the first quarter of the new financial year, Nayar said.

A pickup in investment activity is unlikely to take root until the second half of the financial year, which will act as a drag on the overall manufacturing growth. Moreover, with a repo rate cut highly improbable in 2014, interest rates will remain sticky, limiting any improvement in consumption, she said.

Natural gas output is likely to remain sluggish in the near term. To a large extent, performance of domestic coal mining will crucially affect growth of mining and quarrying in this financial year, which will in turn affect electricity generation. “The outlook for the manufacturing sector, as things stand, seems to be bleak. Weak demand and investment conditions continue to plague the sector,” Ficci president Sidharth Birla said.

Factory output started to decline in October, when the IIP contracted 1.2 per cent, and continued till December. It entered the positive zone in January and slipped again into the negative territory in February.

Manufacturing, which constitutes over 75 per cent of the index, declined 1.2 per cent in March against 4.3 per cent growth a year earlier. Production of capital goods, a barometer of demand, shrank 12.5 per cent, in sharp contrast to a 9.6 per cent expansion in the same month in 2013.

Overall, 12 of the 22 industry groups in manufacturing showed negative growth in March compared with the corresponding month of 2013.

Output of consumer goods declined 0.9 per cent in March compared with 1.8 per cent growth a year ago. The consumer durables segment contracted 11.8 per cent in March against 4.9 per cent decline previously. Consumer non-durables output expanded 7.2 per cent compared with a 7.3 per cent growth in the year-ago period. Power generation expanded 5.4 per cent in March while the mining sector declined 0.4 per cent.

Commenting on the dismal IIP data for March, CII director general Chandrajit Banerjee said low consumption and investment demand, which is contributing to negative growth in the manufacturing sector, was the matter of concern. “The negative growth of consumer durables reinforces our view that the sector continues to be stymied by the high interest rates prevailing in the economy,” he said.

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