IIP: Weak consumption demand does not bode well for economy

As per the user-based classification, four segments of the factory output such as primary goods, capital goods, intermediate goods, and infrastructure goods registered positive growth in March this year in comparison with their growth during the same month last year. While production of primary goods went up by 5.7 percent, capital goods registered a growth of 0.7 per cent, intermediate goods (0.6%), and infrastructure goods registered a growth of 7.3 per cent.

New Delhi: India’s factory output measured as the Index of Industrial Production grew at a paltry speed of just 2 percent in March this year, the last month of the financial year 2021-22, the dismal performance of factory production primarily attributed to the marginal increase in the manufacturing sector, the largest component of the Index of Industrial Production (IIP).

Growth of just 1.9 percent is also attributed to the high base in March last year when it had recorded a growth of 24.2 percent in comparison with the growth in the factory output in March 2020, just before the Covid pandemic lockdown was imposed in that year. If one looks at the data of each of the three components, manufacturing, mining, and electricity production then they registered a growth of 0.9%, 4 percent, and 6.1 percent respectively.

As per the user-based classification, four segments of the factory output such as primary goods, capital goods, intermediate goods, and infrastructure goods registered positive growth in March this year in comparison with their growth during the same month last year. While production of primary goods went up by 5.7 percent, capital goods registered a growth of 0.7 percent, intermediate goods (0.6%), and infrastructure goods registered a growth of 7.3 percent.

The growth rate of production of infrastructure goods shows the positive outcome of the government’s massive increase in the capital expenditure during the last year despite a brutal Covid wave hitting the country in March-April last year. But the official data also shows the weakness of consumer sentiments as both the consumer durables and nondurables recorded negative growth of 3.2 percent and 5.0 percent in March.

The pattern of growth across use-based classification suggests that weak consumer demand is likely to persist for the next few months due to high inflation and rising interest rates as the Reserve Bank announced a 40 basis points hike in the benchmark interbank lending rate, also known as repo rate, early this month.

However, there is likely to be greater demand for infrastructure goods as Prime Minister Narendra Modi’s government has allocated a record Rs 7.5 lakh crore for capital expenditure for the current financial year. As per the revised estimates presented by finance minister Nirmala Sitharman, the capital expenditure was over Rs 6 lakh crore during the last financial year which is a record.

According to some economists, the weakness in the consumption demand coupled with the high inflation rate poses a major risk to fragile economic growth. Second, the adverse economic impact of a protracted Russia-Ukraine war poses a significant risk to India and the world economy. It may dash the hopes of more private investment and foreign direct investment coming to the country as was expected in the wake of two Covid years.