Slowdown in Manufacturing Activity

March 14, 2019
6 months

What is the issue?

Latest manufacturing and inflation data shows that the manufacturing activity in the country continues to remain dull.

How is industrial production at present?

  • The latest Index of Industrial Production (IIP) data shows that output across the broad sector expanded 1.3% in January, 2019.
  • This is a clear loss of momentum from the 3% pace in December, 2018 and a drastic slowdown from the 8.7% growth seen in January 2018.
  • Overall, industrial output growth slumped to 1.7% from 2.6% in December, 2018 and 7.5% a year earlier.
  • It's because production in 12 of the 23 industry groups that comprise the manufacturing sector shrank from a year earlier.

What are the worrying trends?

  • The key job-creating industries, including textiles, leather and related products, pharmaceuticals, rubber and plastic products, and motor vehicles, reported contractions.
  • This is an unhealthy sign for the real economy.
  • Capital goods contracted 3.2%, in contrast with the 12.4% expansion posted a year earlier.
  • Notably, this is a closely watched indicator for business spending plans, and a sustained revival on this vital front may take time.
  • Moreover, with sentiment on capex at a one-year low, Indian businesses plan to curb outlays on hiring and capital spending.
  • Besides, growth in consumer durables output was low at 1.8% (7.6% in January 2018).
  • This is another clear sign that spending on consumption of non-essentials remains in search of favourable factors.

What does the inflation scenario indicate?

  • The price gains measured by the Consumer Price Index (CPI) accelerated to a four-month high of 2.57% in February, 2019.
  • However, there is a persistent deflationary trend in the prices of some farm items.
  • This is unfavourable to the economy as it reflects a collapse in pricing power in the agrarian heartland.
  • Vegetables, fruits and pulses and products all posted negative rates of inflation from a year earlier, of around –7%, –4% and –3% respectively.
  • Urban consumers may be benefitted with the increased affordability of vegetables and fruits.
  • But the rural demand for manufactured goods will remain depressed unless there is a meaningful growth in the farm sector’s economic fortunes.

How does the future look?

  • Saudi Arabia has committed to deepening its production cuts in order to keep crude oil prices well-supported.
  • So it appears unlikely that India’s fuel and energy costs will stay favourable for much longer.
  • With elections approaching, political parties are sure to increase their spending to woo voters, which may lead to inflation.
  • However, for now, with growth slowing and inflation still comfortably within the RBI's 2%-6% target range, an interest rate cut is expected to boost the economy.


Source: The Hindu

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