After IIP growth of 133.52% in Apr-21, 27.61% in May-21, 13.63% in Jun-21 and 11.45% in Jul-21; IIP growth for Aug-21 stabilized at 11.86%. The crux of the matter is that the 11.86% IIP growth in Aug-21 is on the -7.13% lower base of Aug-20. Now comes the interesting part. If you adjust for the fall in Aug-20, then the Aug-21 IIP number is 3.88% higher than the Aug-19 figure. This is the first month in FY22 that pre-COVID levels of IIP have been breached.
There are two points to keep in mind. August is the last month of base effect and the IIP has grown 3.88% over pre-COVID levels, which is commendable. How does the cumulative picture for the first five months of FY22 look like. The Apr-Aug IIP has shown a growth of 28.64% yoy, which is largely base effect. Compared to first 5 months of FY20, IIP is still -3.52% lower than the pre-COVID period. Indian economy may still have a couple of months to show cumulative growth over pre-COVID levels, but it is getting there.
The spate of positive revisions in IIP over the last 6 months are over. For the latest month, the IIP for Jul-21 has been left unchanged. However, the final estimates of IIP growth for May-21 have been scaled down from 28.60% to 27.61%.
How did the components of IIP pan out in FY22?
We currently have 5 data points in IIP for FY22 i.e., April, May, June, July and August. That is a good base for a yoy comparison. How did the 3 key IIP components of mining, manufacturing and electricity pan out for the Apr-Aug 2021 period. Mining growth stood at 25.1%, manufacturing growth at 31.2% and electricity growth at 15.4%. The overall IIP growth in the first 5 months of FY22 was 28.64% yoy.
To be more granular, we also look at FY22 (Apr-Aug) data and compare it to the FY20 (Apr-Aug). The good news is that it has improved substantially compared to previous months. For example, on a 2 year basis, the mining sector was up a healthy 2.58%, manufacturing was down -5.40% and electricity was up 3.40%. Overall IIP for the Apr-Aug period gave the best performance, lower by just -3.52%. That is due to the overt impact of manufacturing, which has 77.6% weight in IIP basket. With capacity slack, manufacturing is still short of pre-COVID levels after 5 months of FY22.
How IIP components compared over pre-COVID period
We can break up the 11.86% Aug-21 IIP growth into mining, manufacturing, electricity. To get a more realistic picture of the structural impact of COVID 2.0, we assess growth on a YOY basis and also over Aug-19.
Since the IIP growth reported by MOSPI is a yoy number, it remains vulnerable to base effect. However, one way to neutralize the base effect is to compare the IIP figure with the corresponding figure in FY20. In the above table, the last column shows that mining and electricity are comfortably above pre-COVID levels while manufacturing is just about showing growth over pre-COVID levels. Due to the 77.64% weight of Manufacturing in the IIP basket, the overall IIP growth over Aug-19 levels has been limited to 3.88%.
Mining IIP is up 23.57% yoy, and compared to Aug-19, the growth is still positive at +12.82%. Manufacturing is just about beginning to pick up and has, at least, turned positive over Aug-19 levels, despite the slack. Electricity, like mining, has also shown healthy growth over pre-COVID levels at 13.89%. For Aug-21, the overall IIP is up 11.86% despite the waning of the base effect. For the first time in FY22, the monthly IIP showed positive growth of 3.88% over the pre-COVID levels. That is a good signal that recovery is on track.
Aug-21 IIP could gradually impact monetary thinking
In the Oct-21 monetary policy announcement, the RBI stuck to its commitment to keep rates low and stance accommodative till durable growth was back. Aug-21 is the first signal that durable growth is getting back. If this evidence repeats for a couple of months and the inflation remains above 4%, the RBI may have enough incentive to rethink its dovish stance. That is the next big signal for market watchers to concern themselves about!