India witnessed the biggest drop in industrial production yet with output crashing by 16.7 per cent in March, as factories shuttered down towards the month-end due to the nationwide lockdown. But economists predict April and beyond to be much worse, with a month-long suspension of industrial units across sectors, many of which still remain hamstrung by lack of labour, logistics and raw materials.
The latest changes in the Index of Industrial Production (IIP) led to annual growth in 2019-20 contracting by 0.7 per cent as opposed to a growth of 3.8 per cent in 2018-19, data released on Tuesday showed. The previous instance of a record fall was more than than 10 years back in February 2009, when industrial production had tumbled by 7.2 per cent.
Industrial production had been tapering off since 2019-end, but a rebound in February had pushed up overall growth to a seven-month high of 4.6 per cent. "For the year, metal products registered impressive growth with positive growth in apparel and food products. Otherwise it was quite lacklustre," said Madan Sabnavis, Chief Economist, CARE Ratings. Going forward, the picture for April would be worse, with virtual nil growth in most sectors. This will mean a very large dip in growth rate in manufacturing with only some segments like food and pharma possibly showing positive growth, he added.
Manufacturing hit badly
Despite an economy-wide shutdown, March did not see broad-based slowdown across sectors. Manufacturing bore the biggest brunt, contracting by 20.6 per cent after 3.06 per cent growth the previous month. The sector accounts for 78 per cent of the IIP and all 23 of the sub-sectors within manufacturing recorded year-on-year contraction.
Most importantly, the capital goods segment denoting investment in industry contracted 35.6 per cent in March, following February's 9.7 per cent. Production in the category has remained in the red for the 14th straight month, despite government efforts to open up even more sectors to easier foreign direct investment flows last year.
In line with their performance over the past few months, the automobiles segment and computer, hardware manufacturing segments saw the biggest levels of contraction. Motor vehicle production fell 49.5 per cent in March, after February's 15.6 per cent drop. Similarly, production of electronics also reduced by more than 41 per cent, as compared to a 15 per cent decline in the previous month.
Elsewhere, electrical equipment and machinery production shrank the fastest. Likewise, the biggest chunks of the manufacturing sector such as basic metals and refinery products also saw output dipping.
Moreover, the month saw electricity generation fall by 6.8 per cent after a 11.5 per cent rise in February. Mining output remained relatively unscathed in March after a 9.6 per cent growth in February.
Consumer demand fizzles
Consumer durable production was the biggest casualty of the lockdown among user-based industries, recording a 33 per cent fall in production. Even before the latest Covid-19 crisis, the data from the beginning of the year shows that production of consumer durables had continued to drop with March being the latest in a 10-month long contraction-spree.
"Unsurprisingly, the extent of contraction is the most severe in March 2020 in the case of capital goods and consumer durables, highlighting the pause in investment intentions and deferral of non-essential consumption. Even consumer non-durables, which includes several essential items, witnessed a 16.2% contraction in output in March 2020, as the lockdown interrupted production in several factories," said Aditi Nayar, Principal Economist at ICRA. Consumer non-durables had recorded zero growth in February, after two consecutive months of contraction.
Nayar stressed that GDP growth is expected to slide to 2 in the fourth-quarter of FY20 from 4.7 per cent in the third quarter despite the anticipated improvement in agricultural GVA growth in that quarter. Overall, ICRA expects GDP growth moderated to 4.3 per cent in 2019-20.
Economists remained pessimistic on growth prospects for April. "Any recovery in industrial production will only be gradual as the sector in the short to medium term will continue to struggle with sluggish demand, supply chain bottlenecks, raw material availability, labour issues and credit squeeze," said Rajani Sinha, Chief Economist & Head Research at Knight Frank India.