India's Factory output falls to the lowest level in over 2 years

India’s industrial production dropped an annual 1.9% in February as manufacturing contracted 3.7%, the sharpest drop in 28 months, while exports tumbled 3.2% in March, recording its second straight month of contraction. 

Rating agency Fitch affirmed India’s sovereign rating at “BBB-” with a stable outlook and it  expects the country’s economic growth to accelerate from 4.7% in FY14 to 5.5% this fiscal and 6% next year. Earlier this week, the International Monetary Fund had forecast India’s GDP growth to accelerate from 4.6% in FY14 to 5.4% in FY15 and further to 6.4% in FY16. 

In Q3 of FY14, the trade deficit stood at $28.6 billion against $29.9 billion. The reduction in trade deficit in Q3 suggests further improvement in the (current account deficit)  for  Q4.  If services exports, remittances and investment income remain broadly unchanged in Q4, CAD for fiscal 2014 could fall below 2% of GDP — for the first time since fiscal 2008-09. Exports for all of FY14 stood at $312 billion against the targeted $325 billion but higher than $300 billion in FY13, a growth of 4%. 

Importantly, given the prolonged slump in domestic demand, exports of goods and services as a share of GDP was projected to rise from 22% in FY11 and 24% in FY13 to 24.9% in FY14, as per advance GDP estimate released a few weeks ago. Imports, however, were projected to account for 28.8% of GDP in FY14, down from 30.7% in the previous year. 

As for industrial output, electricity generation grew at its fastest since September last year at 11.5% in February and mining posted a 1.4% expansion. These were, however, not enough to offset a 3.7% contraction in manufacturing, stoked by a demand collapse as the industrial production slumped from 0.8% growth in January. In six of the 11 months to February, industrial production witnessed contraction.