Dec-21 IIP tapers to 10-month low of 0.44% on Omicron impact

12 Feb 2022 , 10:33 AM

The month of December 2021 marked the 10th consecutive month of positive IIP growth for the Indian economy. However if Nov-21 saw the first signs of IIP waning due to the Omicron effect, Dec-21 saw IIP almost back to the baseline, growing at just about 0.44% yoy. Clearly, Omicron worries were prominent in November and December 2021 and that has rubbed off on IIP numbers. The consensus estimates for IIP had been pegged in the range of 1.5% to 2% but actual IIP growth at 0.44% was way 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. IIP for Sep-21 and Oct-21 were in a sustainable positive growth base. However, November and December 2021 IIP data have shown visible signs of Omicron stress.

How does the 9-month cumulative picture for FY22 look?

With the Dec-21 IIP announced, we have credible data for the first 9 months of FY22. For this 9-month period, the cumulative IIP has grown by 15.2% yoy. But how does the picture look compared to the Apr-Dec 2019 period (sans the base effect). Compared to pre-COVID levels, cumulative IIP for first 9 months is still lower by -0.12% compared to the corresponding 9 months to Dec-19. We are just inching back to the pre-COVID levels.

Let us talk about the upgrades / downgrades to previous IIP estimates and they presented a mixed picture. The final IIP estimate for Sep-21 was upgraded by 105 bps from 3.30% to 4.35%. At the same time, the first revised estimate for Nov-21 has been lowered by 8 bps from 1.42% to 1.34%. Hopefully, with the Omicron effect waning in December and January, the IIP revisions should be favourable in the remaining months of FY22.

Time to look at break-up of cumulative IIP for FY22

We have 9 data points on IIP for FY22 i.e. April to December. Here we look at the 3 key IIP components of mining, manufacturing and electricity during this period. Mining growth for 9 months stood at 16.0%, manufacturing growth also at 16.0% and electricity growth at 9.4%. The overall IIP growth in the first 9 months of FY22 was 15.2% yoy.

A better way is to look at cumulative FY22 (Apr-Dec) data and compare it to the FY20 (Apr-Dec) period. On a 2 year basis, mining sector was up 3.24%, manufacturing output was lower by -1.28% and electricity was up 5.46%. Overall IIP for the Apr-Dec period is still marginally lower by -0.12%, but 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 December 2021 IIP traction

We can break up the 0.44% Dec-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 Dec-20	IIP Index Dec-21	IIP Growth Over Dec-20	IIP Growth Over Dec-19
0.1437	Mining	117.30	120.30	+2.56%	-0.48%
0.7764	Manufacturing	139.00	138.80	-0.14%	+2.56%
0.0799	Electricity	158.00	162.50	+2.85%	+8.10%
1.0000	Overall IIP	137.40	138.00	+0.44%	+2.65%

 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 credible as a data point.

Interestingly, the 2-year numbers look a lot better for Dec-21 compared to Nov-21, despite the lower growth. But that is more because the Dec-19 period was a weak base period and hence the 2 year growth is beginning to look strong. However, the high frequency data does indicate that there has been a strong negative impact on IIP in November and December 2021 due to the concerns over the Omicron variant. That is the gist of the IIP numbers.

Dec-21 IIP data almost ratifies RBI stand in Feb-22 policy

When the Monetary Policy Committed (MPC) announced the monetary policy on 10-February, just a day ahead of the IIP announcement, growth fears were embedded. One of the key reasons offered by the RBI for not hiking either the repo rates or the reverse repo rates was the concern over weak private consumption. If you look at the IIP data for Dec-21, it is exactly weak private consumption that has pulled down the IIP to almost neutral level. In retrospect, the RBI argument for keeping the rates static and the stance accommodative have been largely ratified.

In our note on Nov-21 IIP data, we had specifically pointed out that while Feb-22 monetary policy would be an inflation driven policy, it cannot ignore growth altogether. We had also underlined that the hawkish stance of the RBI may be put off till April. Two factors will be critical at this juncture. How the US Fed responds to 7.5% inflation in the US and how India recovers post Omicron fears; will be the 2 drivers of April monetary policy. Clearly, the government is not going to give up its economic recovery obsession easily.