Workers assemble Royal Enfield motorcycles inside its factory in Tamil Nadu. Photo: AFP/Arun Sankar

India’s November industrial output declined after growing in the earlier two festival months after six months of decline since March.

The drop dampened prospects of a pickup in the gross domestic product (GDP), increasing pressure on the government to allocate more resources to investment in capital and infrastructure in its February 1 national budget.

Production and consumption have contracted since March following a countrywide lockdown to contain the Covid-19 pandemic but picked up briefly in September and October as people made their annual festival purchases.

The Index of Industrial Production (IIP) declined 1.9% compared with 2.1% growth in November 2019, the government said on Tuesday. India’s economy is forecast to shrink by 7.7% in the year ending March 31. The central bank had earlier projected the GDP to contract by 7.5%. Brokerages and rating agencies projected the gross domestic product to shrink almost in double digits.

The IIP contracted by 57.3% in April and the measure stayed in the negative until September with a 0.5% rise, and a 4.2% increase in October.

Electricity consumption grew 3.5% in November compared with 11.2% in October and a fall of 4.6% from the beginning of the financial year on April 1 to the end of November.

Manufacturing in November declined 1.7% over the same month a year earlier and followed 3.5% growth in October. It declined 17.3% from April to November.

“The mild de-growth in consumer durables and non-durables in November 2020 suggests that the healthy performance in October 2020 was powered by inventory-building prior to the festive season, which subsequently lost momentum,’’ said Aditi Nayar, principal economist at rating agency ICRA. She expects a pick up from December.

“The pace of growth of many sectors has improved in December 2020, reflecting a waning of the unfavorable base effect, and pickup in demand after the temporary post-festive slack,’’ said Nayar.

An Indian worker moves a metal structure at a plant in Kheda region, near Ahmedabad, Gujarat state. Photo: AFP

“With lead indicators such as electricity demand, exports, and Goods Services Tax (GST) generation displaying a rebound in activity in December 2020, we anticipate a pickup in the IIP back to a growth of 2-4% in that month.’’

Still, there was optimistic news on inflation, with CPI inflation slowing to 4.59% in December, compared with 6.93% in November, the government said. More critically, food inflation slowed to 3.41% in December from 9.5% a month earlier. A deceleration in inflation makes it easier for a central bank to lower interest rates to revive demand.

In Mumbai, the Reserve Bank of India cautioned in its Financial Stability Report released on Monday that banks’ gross non-performing assets (NPA) may surge to 13.5% of loans by September 2021 from 7.5% in September 2020 in the baseline scenario. NPAs could escalate to 14.8% if the macroeconomic environment deteriorates, it said.

The RBI recommends that the need of the hour is for banks to assess their stress situation and start raising capital proactively. Surging prices of stocks helped by a surge in cheap overseas funds, ironically during an economic downturn, could provide succor to banks seeking to raise capital to beef up future loans capacity.

Governor Shakti Kanta Das cautioned there was a disconnect between financial markets and the real economy. The Sensex index and Nifty index of BSE Ltd and National Stock Exchange respectively are both near record highs even as the economy is on way to registering its worst yearly contraction. Private banks are trading at all-time highs but almost all state-run banks are much lower from even their year highs.

This enables easier access of capital for private banks as investors are lured by the demand for their stocks and rising prices. Banks such as Kotak Mahindra Bank and HDFC Bank have even raised funds to take advantage of the buoyant market conditions.

Workers assemble a car at the Tata Motors factory in Pune in the Indian state of Maharashtra. Photo: AFP

For state-run banks, on the other hand, high levels of government ownership only increase the responsibility of the government to re-capitalize these lenders. In the present conditions with the government having to battle a slowing economy, tepid revenue collection and rising expenditure to meet pandemic related expenses and sudden surge in defense spending because of Chinese invasion and occupation into parts of Indian territories in Ladakh, any re-capitalization may take longer and hurt the state-run banks even more.

Typically, high NPAs also make it tougher for banks to increase lending since they have to set aside a higher amount of their reserves to cover for bad loans. Yet, slowing bank credit may soften the NPA blow on the lenders. Bank credit growth slowed from 5.7% in March 2020 to 5.3% by September 2020.