Nov-21 IIP tapers to 1.42%; lower than consensus estimates

13 Jan 2022 , 08:58 AM

The month of November 2021 marked the ninth consecutive month of positive IIP growth for the Indian economy. If the base effect had been waning in the last few months, November 2021 saw tepid IIP growth despite a negative IIP base in Nov-20. Clearly, Omicron worries have become prominent and that has rubbed off on IIP numbers. The consensus estimates for IIP had been pegged closer to 3%, but actual IIP growth at 1.42% was well below street expectations.

Data Source: MOSPI

The year 2021 can be broadly divided into 3 phases. IIP growth in Mar-21, Apr-21 and May-21 were classic data outliers due to low base effect. The period from June to August was the process of normalization as base effect diminished. However, the IIP in Sep-21 and Oct-21 were on a positive growth base, so they are a lot more genuine. There is a small problem in the November IIP story. The Oct-21 IIP grew 7.8% over Oct-19, exhibiting genuine recovery from the COVID impact. The Nov-21 IIP is actually -0.23% below the Nov-19 levels breaking the positive pre-COVID growth trend since Aug-21.

Quick look at the 8-month cumulative picture

With the Nov-21 IIP announced, we have reliable data for the first 8 months of FY22. For this 8-month period, the cumulative IIP has grown by 17.4% yoy. But how does the picture look compared to the more comparable Apr-Nov 2019 period. Compared to pre-COVID levels, cumulative IIP for first 7 months is still lower by -0.56% compared to the corresponding 8 months to Oct-19. We are just about back to pre-COVID levels.

Let us talk about the upgrades to previous IIP estimates and they have been generously positive. The final IIP estimate for Aug-21 was upgraded 94 bps from 12.03% to 12.97%. If you include the first revision, the total upgrade has been 152 bps. At the same time, the first revised estimate for Oct-21 has been raised by 81 bps from 3.20% to 4.01%. These are positive tidings and give hope of further upgrades for November data too.

How does break-up of cumulative IIP look like?

We have 8 data points in IIP for FY22 i.e. April to November. Here we look at the 3 key IIP components of mining, manufacturing and electricity during this period. Mining growth for 8 months stood at 18.2%, manufacturing growth at 18.5% and electricity growth at 10.2%. The overall IIP growth in the first 8 months of FY22 was 17.4% yoy.

A better way is to look at FY22 (Apr-Nov) data and compare it to the FY20 (Apr-Nov) period. On a 2 year basis, mining sector was up 3.78%, manufacturing was lower by -1.88% and electricity was up 5.13%. Overall IIP for the Apr-Nov period is still lower by -0.56%, but is almost at par with pre-COVID levels. The pressure is coming from the manufacturing sector, with its predominant weightage of 77.64% in the IIP basket.

A bird’s eye view of the November 2021 IIP traction

We can break up the 1.42% Nov-21 IIP growth into mining, manufacturing and electricity. We also compare with 2-year ago period to get a clearer picture of structural impact.

Weight	Segment	IIP Index Nov-20	IIP Index Nov-21	IIP Growth Over Nov-20	IIP Growth Over Nov-19
0.1437	Mining	106.60	111.90	+4.97%	-0.67%
0.7764	Manufacturing	128.50	129.60	+0.86%	-0.71%
0.0799	Electricity	144.80	147.90	+2.14%	+5.67%
1.0000	Overall IIP	126.70	128.50	+1.42%	-0.23%

  Data Source: MOSPI

IIP growth reported by MOSPI is a yoy number and, hence, vulnerable to base effect. This makes growth look optically attractive and that can be neutralized by looking at 2-year change in the IIP figure. This gives a clearer picture of the growth over the pre-COVID levels and is therefore more reliable.

The month of Nov-21 has seen a sharp loss of momentum compared to Oc-21 and that is evident from the way the 2-year growth numbers of mining and manufacturing slipped into the negative and electricity has tapered. The overall IIP contraction over Nov-19 levels stands at -0.23%, as against positive 7.4% growth in October. Omicron appears to have disrupted the growth momentum of IIP in a rather significant way.

February 2022 monetary policy likely to be very interesting

The policy thinking is likely to be a state of flux at the current juncture. For example, the domestic inflation has gone up sharply and even US inflation is at 7%. That means; the RBI and the US Federal Reserve are likely to take a relatively hawkish stance. However, with the growth momentum substantially slowing down in November due to the onset of Omicron, the RBI is likely to have one eye on the growth impulses too.

While February will be an inflation driven policy, it will not ignore growth altogether and that hints at a likelihood that a hawkish rate hike may be put off till April; at least after the Fed releases its own rate outlook. The weak growth impulses may allow the RBI to indulge in a neutral stance for one more policy period.