Signs of slowdown in Indian economy have been visible for a few months now, with automobile sales hitting speed bumps and volume growth slowing even in fast moving consumer goods. India's factory output turning negative sends further signals of a slowdown in consumption and investment, and analysts don't see a quick turnaround.
Data released by the Central Statistics Office shows the index of industrial production in March contracted 0.1 per cent. In February, IIP had grown at just 0.1 per cent. Manufacturing contracted 0.4 per cent in March. Capital goods production contracted 8.7 per cent.
"Contraction in capital goods and intermediate goods is worrisome as it is indicative of the investment activity in the economy. Both the segments have been witnessing negative growth rates since November 2018," said Manisha Sachdeva, associate economist at CARE Ratings.
Consumer durables growth also contracted, symptomatic of the weak demand conditions in the country.
A liquidity crunch, making credit availability difficult is one of the reasons behind falling industrial production, say economists.
"While bank credit to industry has accelerated during FY19 (6.9 per cent in March 2019, versus 0.7 per cent in March 2018), it remains well behind the overall credit growth (13 per cent on 26 April 2019). Credit growth is particularly unfavourable for MSME (micro, small and medium enterprises) and medium industries (0.7 per cent and 2.6 per cent respectively in March," said Sujan Hajra, chief economist at broking firm Anand Rathi.
Non-banking finance companies account for a sizeable portion of funding in sectors like automobiles. Several of these NBFCs faced liquidity challenges in the backdrop of defaults at IL&FS.
There is an expectation that there will be another round of interest rate cut by Reserve Bank of India in a bid to boost growth and investment, as inflation remains well below the central bank target.
However, Hajra feels that an interest rate cut may not be too helpful in lifting industrial output as a slower deposit than credit growth is preventing transmission of rates to the credit market.
Upasna Bhardwaj, senior economist at Kotak Mahindra Bank feels growth prospects may remain muted in the current financial year ending March 2020.
"Growth in the economy had been supported primarily by consumption and government's focus on affordable housing, roads and infrastructure...However, the fiscal scope to support capex in FY2020 will be constrained given the tall ask from GST collections and higher revenue expenditure," said Bhardwaj, adding, private sector investment was also unlikely to see a sharp recovery given their weak balance sheets.
Sachdeva of CARE is not expecting any pickup in industrial output for at least a few months due to increased likelihood of lower investment activity amid uncertainties surrounding the general elections.
