New Delhi: Output from India’s factories in March contracted by 2.3%, the worst in at least 16 years, signalling that a much-touted economic recovery isn’t imminent and adding to the challenges facing the country’s incoming government which, analysts say, will now have to likely come up with a fresh stimulus package to revive demand in the economy.
“The argument that we have bottomed out seems to be based on the April feel-good (data) that is going around. These are faint signals and cannot be used for a compelling argument for anything,” said the chief statistician of India, Pronab Sen.
For the year ended 31 March, growth in factory output decelerated sharply to 2.4% compared with 8.5% the previous year, data released by the Central Statistical Organisation showed on Tuesday.
Also See Industrial Contracts (Graphic)
All use-based industries, except so-called basic goods ones, contracted in March compared with a year ago. Capital goods production, considered an indicator of investment activity, contracted for the first time this year, by 8.2%, though analysts attribute this to a high base effect (a high growth in March 2008). And consumer non-durables which include consumer products such as soaps and shampoos contracted by 3.6% for the second month in a row compared to a year ago.
However, Godrej Group’s chairman and managing director Adi Godrej contested the factory output data. “These numbers are absolutely incorrect. There are lot of errors in the way these figures are calculated and I do not take them seriously. In the month of March, consumer demand has not declined at all and even the production has been very strong,” Godrej said.
Manufacturing, which constitutes around 80% of the Index of Industrial Production (IIP) as the factory output metric is called, also shrank 3.3% in March compared with a year ago.
The sector, which is the bellwether of industrial activity has been rapidly losing ground, with tight credit conditions and collapsing demand at home and abroad. India’s merchandise exports in March declined by 33.3% on weak demand from the US and Europe.
In terms of industries, 12 out of 17 industries that are included in IIP showed negative growth in March.
“Though a negative growth in IIP was expected, the extent of contraction is surprising. Earlier, we were expecting an economic recovery by second quarter of the current fiscal. However, now we see a recovery only by the third quarter. We expect the negative growth in IIP to continue till the end of second quarter of 2009-10,” said N.R. Bhanumurthy of the Institute of Economic Growth.
Tata group’s chief economist Siddhartha Roy said the new government would need to provide more fiscal stimulus to the economy and enforce the ones announced earlier. “A lot more needs to be done through fiscal stimulus. A new government has to take a view on this as soon as it takes charge. The government also need to focus on improving credit availability. The economic crisis has dented the investment confidence leading to erosion in consumer confidence. A recovery will not happen automatically.”
Throwing good money after bad won’t help, said another economist.
Nikhilesh Bhattacharyya of Moody’s Economy.com, an economic research firm, said in a report released Tuesday that stimulus packages might not ensure an early economic recovery in India. “Rather than using the current crisis as a source of opportunity to implement much needed reforms, policymakers have placed a greater emphasis on spending. This will help limit the downturn, but will not ensure a robust recovery,” he wrote.
The Reserve Bank of India has slashed interest rates six times since October, last lowering a key rate by a quarter-point to 3.25% on 21 April.
The central bank expects economic growth, which decelerated to a six-year low of 5.3% in the December quarter, to pick up to as much as 6% over the next year.
Former finance minister Yashwant Sinha told Bloomberg on Monday that policymakers still need to lower rates “massively” and that India’s new government should speed up economic reform.
Still, there were some analysts who preferred to disregard the data released on Tuesday because other data signals otherwise.
Goldman Sachs, in a report released on Tuesday, said it expected a revival in April. “The Purchasing Manager’s Index for April has shown its first expansion after contracting for five successive months. Motor vehicle sales have also picked up in the last three months and railway freight has also shown some increase. The excess liquidity in the system, a substantial easing of financial conditions and declines in some key interest rate spreads suggest to us that activity will pick up in second half of FY10.” The agency expects India’s economy to expand by 5.8% this year.
Such so-called “green shoots” theories have gained ground in recent weeks but one economist said it might be prudent to wait and see what the new government does.
“The green shoots of recovery will be confirmed once the approach of the new government becomes clear from the forthcoming Union budget,” said CARE Ratings chief economist Soumendra Kumar Dash.
Graphic by Sandeep Bhatnagar / Mint
Vijaya Rathore and Bloomberg contributed to this story.