Dec IIP indicates industrial recovery is still fragile: Ind-Ra

16/02/2016 12:04

The Index of Industrial Production (IIP) grew negative 1.3 per cent in December 2015, as against India Ratings and Research’s (Ind-Ra) forecast of 0.8 per cent. A second consecutive month of negative growth in factory output once again demonstrates that the industrial recovery is still uneven and fragile, said the rating agency.

“A part of the negative growth in December 2015 is an outcome of floods inundating Chennai, a major manufacturing hub for electronics and automotive,” Ind-Ra said in a report.

Of the USD 38 billion annual production of auto components in India, almost 25 per cent (USD9.5bn) comes from Chennai and its surrounding automotive belt. However, cumulatively during April-December 2015, at 3.1 per cent factory output growth is still higher than the 2.6 per cent growth recorded during the same period in 2014. Ind-Ra expects industrial gross value added to grow at 7.3 per cent in FY16.

Manufacturing growth came in at negative 2.4 per cent in December 2015, lowest since October 2014. After a relatively robust performance till October this fiscal, the manufacturing sector growth has dwindled. Although the government is trying to accelerate the manufacturing sector growth with emphasis on ‘Make in India’ and stepped up spending on infrastructure, it is still besieged with a number of challenges. A number of manufacturing sectors are still saddled with excess capacity due to lack of demand while few others are facing the brunt of cheap Chinese imports. A depreciating yuan and growth slowdown have resulted in an uptick of imports from China.

10 of the 22 industry groups in the manufacturing sector showed a contraction in December 2015. The capital goods sector contracted by 19.7 per cent in December 2015. This is the second consecutive month of negative growth in capital goods. However, cumulatively for April-December 2015, capital good is still showing growth of 1.7 per cent albeit lower than the 5.1 per cent recorded during the same period in 2014.

The Reserve Bank of India had earlier noted that the buoyancy witnessed in the capital goods sector till October 2015 is primarily from the demand generated from the projects stalled earlier, but have been revived lately. Clearly so long as greenfield investments do not pick up, sustaining capital goods growth will remain a challenge. Yet, Ind-Ra believes with government focus on increased capex in the sectors vital for growth – roads, railways, ports, rural roads etc, we may have to wait for more data to discern a trend.

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