India’s factory production improved sequentially from a contraction of 1.8% in June 2012 to a minuscule 0.1% in the following month and this perhaps is the only silver lining in an otherwise gloomy industrial scenario.
In fact, there is an element of exaggeration here as the growth rate of 0.1% in July 2012 is due to rounding.
Actually, the index of industrial production for this month stood at 167.3 as against 167.2 a year ago, yielding an increase of 0.06%. That is to say, there was a virtual freeze in the output of mining, manufacturing and utility segments combined on a point-to-point basis.
Underscoring the gravity of the industrial slowdown – and the likelihood of its continuance in the months ahead – is the extremely disappointing performance in the capital goods sector.
A proxy for investment trends in the economy, the production of capital goods had fallen for the fifth straight month in July and, if the positive growth in February 2012 is factored in, for as many as 10 months. The incremental growth in intermediate goods had declined to 1.1% in the latest month; this is on top a tepid showing of late.
According to data released by the Central Statistical Office, all the three sectors- mining , manufacturing and power generation, had acted as a drag on the overall industrial production growth. In mining, the tempo had slowed down to -0.7% in July 2012 from 0.7% in July 2011, in manufacturing to -0.2% from 3.1% and in electricity to 2.8% from 13.1%.
Since manufacturing accounts for a lion’s share of the weight in the index, the setback in this segment is responsible for the anaemic show in the industrial economy during the latest month.
However, the slowdown is widespread and all the four groups in terms of an use-based classification have recorded a deceleration, and in some cases, a distinct drop, in production during July 2012 vis-à-vis a year ago.
The momentum has slowed down in basic goods ( to 1.5% from 10%) and consumer goods (to 0.7% from 6.4%), with both durables and non-durables proving to be underperformers.
However, the trend in regard to investment goods production is disconcerting. In July 2012, there was a fall of 5%. While this decline is rather small, this comes on top of a steep slide during the preceding four months.
This suggests that demand for investment goods has turned slack for some time and there are no signs of a reversal in the near term. Likewise, the inventory of semi-finished goods and raw materials that go in to the final product, that is represented by intermediate goods is also being pared down by the manufacturing units, if one were to go by the downtrend in the production of this category of products.
In July 2011, there was a decline to the tune of 0.1% in intermediate goods and this year too, the trend is similar but the decline is somewhat larger at 1.1%. This, too, may be a precursor to what may be in store.
With the growth rate rather low key in all the four months of the current year, the cumulative average increase in industrial production works out to -0.1% as against 6.1% during the corresponding period of 2011-12. The pivotal manufacturing showed a contraction of 0.6% in contrast to a spurt of 6.5%.
The setback in the average growth till July was more pronounced in basic goods – 3% compared with 8.1% a year ago and in capital goods --16.8% in contrast to the handsome surge of 8.2%.