Industrial output: Industrial output enters negative zone, contracts 0.1% in June–Economic Times–12.08.2017

India’s industrial production fell to a four-year low in June as manufacturers reduced inventories ahead of the transition to the goods and services tax (GST) rolled out on July 1, but experts say this one-time shock will reverse as the new tax regime settles down.

Factory output as measured by the index of industrial production contracted by 0.1% in June, dragged down by manufacturing output that fell 0.4%, data released on Friday showed. Unfavourable base effect of high 8% growth in June 2016 also magnified the impact.

However, independent economists expect industrial output to rise with GST kicking with 15% rise in sales of passenger vehicles in July pointing to return to normalcy. “As expected, inventory paring prior to the GST resulted in a mild contraction in manufacturing output of 0.4% in June,” said Aditi Nayar, principal economist at ICRA Ltd.

Data released by the Central Statistics Office on Friday showed declining growth in 15 out of 23 manufacturing sectors led by electrical equipment. The government also revised upwards the factory output growth of May from 1.7% in the earlier estimate to 2.8% now.

Except consumer non-durables and infrastructure goods, all other used based categories have contracted in June 2017.

“This clearly points towards the lingering impact of demonetisation on the industrial sector and demonstrates that impact of demonetisation has been far more severe than anticipated earlier.

Not a good news for industrial sector in particular and in general for the economy,” said Sunil Kumar Sinha, principal economist, India Ratings & Research. Reflecting sluggish urban demand, consumer durables output fell 2.1% while capital goods production, an indicator of investment, fell 6.8%. Consumer non-durables production rose 4.9%. “Within the IIP, metals and automobiles are the only non-consumer segments that have grown. Some government activity in infra could be the main driving force,” CARE Ratings said. Mining, power generation and infrastructure/construction goods too recorded poor performance.

Positive outlook
Madan Sabnavis, chief economist at CARE Ratings, said that the restocking of inventories will take place that is likely to boost industrial output and help industrial output grow at around 4-5% in 2017-18. “In addition, favorable monsoon with higher crop output and allowances paid due to 7th pay commission implementation is likely to push consumer demand in the second half of the year.”

Nayar said that notwithstanding the favourable base effect and the rebuilding of inventories post-GST, IIP will grow in July but that would be lower than last year’s growth.

via Industrial output: Industrial output enters negative zone, contracts 0.1% in June

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