Renewed uncertainty

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Syllabus: GS 3

Synopsis: A near-term revival in consumption-led demand appears bleak now.

Introduction 

The recent factory output data released by the National Statistical Office indicate a rocky start to the economy in the new fiscal year. 

• April’s Index of Industrial Production (IIP) estimates show all three sectoral parts of the index, i.e. mining, manufacturing, and electricity have suffered reverses, as output slid below the previous month’s levels.
• Due to the second wave of the COVID-19 pandemic, all six end-use categories are, primary, capital, intermediate, and construction goods and consumer durables and non-durables borne month-on-month contractions.

What does the factory output data released by the National Statistical Office show?

 Manufacturing saw production shrink 12.6% from March and contributed considerably to a 13% sequential contraction in overall industrial output. Manufacturing, otherwise, accounts for 77.6% of the IIP.

• Firstly, the NSO advised not to draw a year-on-year comparison. It said that it would be affected by the fact that the nationwide lockdown had stopped many institutions from operating in April 2020.
  •  Figures from April 2019 indicate the IIP registered a marginal 0.08% growth, supported by a 6.8% increase in electricity output from two years earlier.
• Secondly, manufacturing contracted 0.9% from the pre-pandemic level, indicating the deep pothole it finds itself in. The output of capital goods and consumer durables also dropped as compared to 2019 levels by 14.3% and 11.6% respectively. This shows that the outlook for investment in production capacity and unrestricted consumption remains upsettingly weak.
• Thirdly, the second wave brought in demand destruction as consumer non-durables, comprising household essentials, had contracted by 11% from March. The IIP arrives with a lag of six weeks, so it can be viewed as an indicator of past economic activity instead of a tool to assist in providing an exact projection.

The conclusion 

• Job losses are accelerating and consumer spending is impacted by a blend of falling real incomes, exhausted savings and increasing health-care costs. This makes the broader outlook for a near-term revival in consumption-led demand appears bleak right now.
• To ensure a long-lasting recovery, the government needs to accelerate targeted, demand-creating fiscal support measures and drastically quicken the pace of vaccinations.