Home / News / India /  IIP contracts sharply in May but at a slower pace than in April

India’s factory output shrank sharply for the third straight month in May, though at a slower pace than in April, signalling the severe impact of the nationwide lockdown on production. Data released by the Central Statistical Organisation (CSO) on Friday showed the Index of Industrial Production (IIP) in May contracted by 34.7% against 57.6% in April.

Recent leading indicators for June have signalled a quicker normalization of economic activity, coinciding with the relaxation of lockdown restrictions from 1 June, but the latest surge in coronavirus cases and renewed curbs may delay the recovery.

June output declined across sectors, with manufacturing, mining and electricity contracting 39.3%, 21% and 15.4%, respectively. Within manufacturing, barring pharma, all sectors showed negative growth, including food products. All sectors according to use-based classification also showed the same trend, including consumer goods sector, which dipped 68.5% in May, even as consumer non-durables narrowed the contraction to 11.7%. “Quite clearly, the lockdown and limited opening up affected production of all industries. Different state rules on transport and labour further exacerbated the situation. While non-essential goods were permitted for production, challenges remained in logistics and labour," said Care Ratings chief economist Madan Sabnavis.

Both manufacturing and services Purchasing Manager’s Index (PMI) showed significant improvement in June over May, though still in contraction zone, reflecting a pickup in economic activity. The finance ministry has claimed “green shoots" of revival with the gradual opening up of the economy, with crucial parameters such as fuel and power consumption, mobility and retail financial transactions witnessing a rebound. Also, India’s fuel consumption recovered sharply from the lowest slump recorded since 2007, after the end of the nationwide lockdown and reached 88% of pre-lockdown sales in June. Demand for bitumen used in road construction jumped 32% in June from a year earlier.

Aditi Nayar, principal economist at Icra Ltd, said she expects the uneven recovery to have continued in June, with the overall IIP likely to record a contraction of 15-20% in that month.

“In our view, pent-up demand, especially for items that are now considered to be essential under the new normal of work from home, would lead to a temporary uptick in production and sales of certain categories of small- to mid-ticket consumer durables in the initial unlock period, which may not sustain subsequently. Rising infections and imposition of localized curbs are raising red flags about the pace of normalization that we should expect in the ongoing quarter," she added.

The International Monetary Fund (IMF) last month said the Indian economy would contract 4.5% in FY21, reversing its rather optimistic forecast in April of 1.9% growth for the same year, citing the larger-than anticipated disruption to domestic activity due to a more severe nationwide lockdown.

IMF chief economist Gita Gopinath, in a blogpost on Friday, wrote even as many countries tentatively exit the Great Lockdown, in the absence of a solution to the health crisis, huge uncertainties remain about the path of the recovery, and that the need for fiscal action does not end here.

“Fiscal policy will need to remain supportive and flexible until a safe and durable exit from the crisis is secured. While the trajectory of public debt could drift up further in an adverse scenario, an earlier-than-warranted fiscal retrenchment presents an even greater risk of derailing the recovery, with larger future fiscal costs," she cautioned.

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