India’s factory output plummeted to record lows in March, with the Index of Industrial Production contracting 16.7%, reflecting the drastic impact of the countrywide lockdown that began on March 25. This comes after a positive growth of 4.5% recorded in February.
Manufacturing sector output slumped 20% in March, while electricity generation shrank almost 7%, according to data released on Tuesday by the Ministry of Statistics and Programme Implementation. The mining sector remained flat, without any growth or contraction in output.
“I have been looking at IIP data from April 1982 onward, and this is the biggest ever contraction since then. It is no surprise, as all industrial activity was halted for one week, apart from State-level lockdowns which began earlier,” said D.K. Pant, chief economist of India Ratings and Research, part of the Fitch group.
“April is going to be much worse. I would project a 60-70% decline,” said Pronab Sen, eminent economist and former Chief Statistician of India. “Frankly, I don’t think most industries will see any recovery. FMCG sector may begin some recovery in May, but the rest of the industry is going to continue in the doldrums.”
All categories of manufacturing industries showed a contraction in production in March, with the worst affected being the automobile sector, which saw a 50% decline, and the computer and electronic products sector, which fell almost 42%. The manufacture of machinery, electrical equipment and other metal products saw a 31-33% fall in output.
“Auto sector has been in negative territory for a while now. This goes beyond the India lockdown,” said Dr. Sen, noting that supply of both electronic components and auto parts were affected by the earlier shutdown in Wuhan, China.
The most resilient sectors were coke and refined petroleum products, which only contracted 1.8%, and food and beverages manufacture, which shrank 10.5% and 6.4% respectively.
Economists said government intervention was long overdue. “For a lot of MSMEs, they may have already lost the plot,” said Dr. Sen, noting that it was not enough for the government to announce loan moratoriums and leave the final choice to banks. “Given their risk aversion, banks will probably not give relief to any but their prime clients. They may not demand repayment of retail loans, but it will be a different story for business loans and SMEs will bear the brunt.”
He pointed to the sharp increase in SME NPAs post demonetisation in 2017-18, and predicted that “we will see a similar situation, at a much larger magnitude”. He added that as restrictions are being relaxed, it was of prime importance for the government to order banks to increase working capital limits for all units for whom the lockdown is lifted, so that they can actually restart production.
Dr. Pant warned that with labour migration still ongoing, reopening industries will struggle to find sufficient workers. “Rural areas were already struggling with low demand. Now the labour supply in rural areas will increase and wages will be depressed even further,” he said. “Urban wages may go up, so with demand being depressed, what will happen to corporate profitability?”
The government’s key priorities must be to protect velunerable sections, including daily wage earners, MSMEs and State governments with precarious finances, he said.
MoSPI data also showed that retail inflation eased slightly in April to 5.84%. With regard to both the Consumer Price Index, which is the basis for inflation figures, as well as the IIP, the Ministry warned that data collection had been affected by the pandemic and is subject to revision.