Mar’19 IIP Update – Output Shows Slowdown in Consumption

Index of Industrial Production (IIP) – entered negative territory in March, contracting to 0.1% compared to 0.1% in Feb’19, below consensus expectation of 1.3%, the first month of contraction since June 2013. Manufacturing output shrank by 0.4% in Mar’19, the same pace as in the previous month, primarily on account of decline in output for capital goods, consumer durable goods, non-durables, intermediate goods as well as base effect.

  1. Manufacturing output contracted to 0.4% in March shows the slowdown in consumption as well as investment and declining PMI data also reflects that the manufacturing output may continue to remain in weak situation in the medium term.
  2. Mining output rose by 0.8 % in Mar’19 compared to 2% in Feb’19 but witnessing a slowdown on account of muted demand due to uncertainty over US-china trade war.
  3. Electricity generation output growth accelerated to 2.2% from 1.3% in Feb’19, primarily on account of higher YoY base.
  4. Primary goods production increased to 2.5% against 1.2% in Feb’19. We think Agricultural output is picking momentum from onwards.
  5. Capital and intermediate goods reported a poor show, indicative of both investment and discretionary consumption are on the downward slide. Their production contracted by -8.7% YoY and -2.5% YoY respectively in March 2019. However, we expect it to turn positive after the result of General elections.
  6. Infrastructure/construction goods output continued to grow at a softer pace of 6.4% compared to 2.4% in Feb’19 owing to a higher base. However, it  remains the sole pocket of strength due to sustained growth in state governments’ spending on capex-related projects.
  7. Consumer durable output growth entered negative territory, declined to 5.1% vs. 1.2% in Feb’19 which shows weakening demand conditions in the country. However, we expect demand to pick-up momentum in the near-term on account of seasonal impact.
  8. Consumer non-durables output also slumped to 0.3% vs. 4.3% in Feb’19, slowdown in government spending towards non durable goods is weighing on consumer non-durables. Looking ahead, we expect strong demand growth for consumer non-durables on account of pro-consumption policies in the Interim Budget.

We think this might pull down the growth of GDP in FY19 on account of the slowdown in government spending which effects the non-discretionary consumption and tight domestic liquidity weighing on consumption. However, we think domestic consumption demand is likely to rebound on the back of a normal monsoon, kick-start of government spending and normalization of stress in NBFC sector.



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