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Feb-22 IIP bounces to 1.69% but you must thank the base effect

The consensus estimates for IIP had been pegged closer to 2% considering that the Feb-21 IIP growth stood at -3.43%.

April 13, 2022 8:07 IST | India Infoline News Service
The month of February 2022 was the 12th consecutive month of positive IIP growth for the Indian economy. With a full year of positive IIP growth and six months after the base effect vanished, one can finally conclude that the COVID impact is well and truly over. Now comes the tougher part of ensuring genuine industrial growth. The consensus estimates for IIP had been pegged closer to 2% considering that the Feb-21 IIP growth stood at -3.43%. However, the low base effect did not give any substantial boost to IIP over the previous month.

Data Source: MOSPI

The last 12 months of sustained positive IIP growth can be broken up into 3 phases. In the first phase between Mar-21 and May-21, IIP growth represented the outlier effect of an inordinately low base. Then the period from Jun-21 to Oct-21 represented a period of sustained normalization as growth gravitated to median levels. IIP from Nov-21 had a bit of Omicron effect, Fed hawkishness effect, input inflation effect and the Ukraine war effect. Due to a combination of these 4 factors, the IIP gravitated towards a mean level of 1.25% IIP growth on a yoy basis. A cumulative analysis would now give a better view.

Looking at the 11-month cumulative IIP picture for FY22

With Feb-22 IIP announced, we have credible data for the first 11 months of FY22. During this 11-month period (Apr-Feb), cumulative IIP has grown by 12.5% yoy. How does this picture look compared to the 2-year ago FY20 period? It gives a better picture of growth over pre-COVID levels. Cumulative IIP for first 11 months of FY22 is a marginal 0.013% higher compared to the corresponding 11 months period from Apr-19 to Feb-20. In short, Indian IIP is still struggling to grow above the FY20 levels and the IIP for Feb-22 would have been rather disappointing had it not been for the generous base effect.

How were the upgrades / downgrades to previous IIP estimates? The final IIP estimate for Nov-21 was downsized by 31 bps from 1.34% to 1.03%. At the same time, the first revised estimate for Jan-22 has been upgraded by 14 bps from 1.32% to 1.46%. It is presenting a mixed bag because we are gradually seeing the combined impact of the 4 big risks to IIP at this point viz. COVID cases, Fed hawkishness, input inflation and Ukraine war situation.

A better approach is to break down cumulative IIP growth

We have 11 data points on IIP for FY22 i.e. Apr-21 to Feb-22. It is true that the overall cumulative IIP for the first 11 months of FY22 has grown by 12.5% yoy but is almost flat on a 2-year basis. IIP has hardly grown compared to pre-COVID levels. We now break up this growth into 3 key IIP components of mining, manufacturing and electricity. Mining growth for 11 months stood at 13.2%, manufacturing growth 12.9% and electricity generation growth 8.2% yoy. This is a comparison of the Apr-21 to Feb-22 period with Apr-20 to Feb-21 period. Overall IIP growth in 11-month period was 12.5%.

However, a yoy growth analysis is a victim of base effect mirage. Hence, we also look at this break up of growth on a 2-year basis to get a pre-COVID picture. Over 2 years, mining sector was up 2.56%, manufacturing  was still lower -1.21% while electricity was up 5.60%. Overall IIP for the Apr-Feb period was marginally higher by 0.012%; virtually at pre-COVID levels. The pressure comes from negative growth in manufacturing, due to its 77.64% weightage in the IIP basket.

How does high frequency IIP growth look like?

We can break up the 1.69% Feb-22 IIP growth into mining, manufacturing and electricity. Having seen 2-year growth, we now look at high frequency MOM growth.

Weight Segment IIP Index
Feb-21
IIP Index
Feb-22
IIP Growth
Over Feb-21
IIP Growth (HF)
Over Jan-22
0.1437 Mining 117.90 123.20 +4.49% -1.20%
0.7764 Manufacturing 129.70 130.80 +0.85% -5.49%
0.0799 Electricity 153.90 160.80 +4.48% -2.90%
1.0000 Overall IIP 129.90 132.10 +1.69% -4.69%
  Data Source: MOSPI

Broadly, there are 3 ways to look at the IIP comparison. There is the yoy comparison, which is vulnerable to base effect. Then there is the 2-year growth, which indicates growth over pre-COVID levels. Finally, there is the high frequency growth over the previous month and this is the IIP measure that captures short term IIP momentum. That has been captured in the last column in the table.

We have been getting these indications from another short term momentum indicator (PMI Manufacturing) and now it is being confirmed by the IIP high frequency data also. For instance, if you look at MOM data, there is negative growth across all the 3 segments. For instance MOM growth is -1.20% in the case of mining, -5.49% in manufacturing and -2.90% for electricity generation. Overall IIP is down -4.69% over Jan-22. This is the number that shows how factors like supply chain disruptions caused by the war, high input costs and central bank hawkishness are impacting growth momentum.

RBI is up against a real policy dilemma

When the RBI announced the April 2022 monetary policy, it maintained status quo on rates and the monetary stance, despite global hawkishness. The argument was that sustainable growth was still elusive. In retrospect, the RBI has been proved correct since IIP has hardly grown over pre-COVID levels and the short term momentum is also negative. But the big question is how much longer can the RBI maintain this stance amidst rampant inflation?

The RBI dilemma stems from the fact that consumer inflation is almost unrelenting and the March 2022 CPI inflation has come in at close to 7%. It is not clear how much longer the RBI can continue to blissfully ignore the inflation reality, but that is not going to be an easy decision. The Indian economy has shown a solid recovery from the COVID lows. The last thing the RBI would want is this advantage getting dissipated by too much enthusiasm in curbing inflation. Either in the June monetary policy, or perhaps even before that, the RBI will have to find answers on how to resolve this dilemma.

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