India’s factory output contracted by 3.5% (-) in March, the worst in five months, as corporations, squeezed by rising borrowing and input costs and sliding profits, hold back capacity expansions hurting jobs and investors alike.
Shrinking demand has hit companies hard at a time when they are looking for options to keep revenues high, maintain reasonable profits with minimal employee layoffs — and since corporate profitability gets hit, investors too shy away.A slowing economy has resulted in lower tax collections, limiting the government’s ability to spend more on welfare schemes, upsetting fiscal plans.
The latest data released on Friday jolted equity markets and the benchmark 30-scrip sensitive index or Sensex of the Bombay Stock Exchange (BSE) ended the day at 16,292.98, down 0.77% or 127.07 points from its previous close at 16,420.05.
Finance minister Pranab Mukherjee said slowdown in global demand and investment activity has impacted IIP.
“The IIP figures are disappointing... Continued weak global business sentiments are also adversely impacting recovery in domestic private investment,” Mukherjee told reporters here.
Both manufacturing and services are hit by the moderation, due to slow growth in exports because of slowing European economies. The weakest links are the capital and intermediate goods segments.
Weak investment demand due to tight monetary conditions and slow policy reforms have led to a sharp decline in output growth in these sectors.
Output in the capital goods sector contracted by 21.3% (-) as against a growth of 14.5% in the same month last year.
Output growth in basic goods, which comprise of infrastructure sectors such as cement, steel, coal and power, appear to be slowing down considerably.
“Domestic investment recovery remains frail... Though RBI’s monetary stance has been reversed in last policy announcement, it will take some more time for interest costs to come down,” Mukherjee told reporters after the IIP data was released on Friday.