Of course, in February 2020, the COVID-19 had just about started to manifest itself. It is only in mid-March that the Indian government went on to impose a complete lockdown; which is yet to be lifted. We shall come back to how this could impact the IIP in the coming months.
How the IIP panned out in Feb-2020
If you break up the IIP growth into 3 key components; mining has grown at 10%, electricity generation at 8.1% and manufacturing at 3.2%. With manufacturing having a weightage of 75.53%, the overall IIP figure normally tends to gravitate closer towards the manufacturing IIP. The cumulative growth in IIP for the April-Feb period (11 months) stands at 0.9%, one of the lowest IIP performances in the last decade. During this 11-month period, mining, electricity and manufacturing have grown at 1.9%. 1.5% and 0.6% respectively.
Manufacturing growth in 13 out of the 23 industry groups has shown positive traction. Base metals showed a growth of 18.2% while chemicals and chemical products grew at 8%. The sharp growth in metals was largely driven by hopes that the Chinese stimulus would give a boost to metals demand. The massive shutdown in China post the Coronavirus pandemic, led to larger orders for Indian chemical companies. On the negative growth side, there were no surprises. Motor vehicles and trailers recorded (-15.6%) de-growth which is visible in the monthly auto numbers. With most auto plants shutting down post the lockdown, the cuts are likely to be much deeper for the month of March. Manufacturing of computers and electronics showed (-14.8%) de-growth. Clearly, Chinese supply chains are badly disrupted hitting electronics production hard; especially since they carry limited inventories.
How will the IIP and CPI numbers impact RBI policy?
In the next few months, the RBI policy is likely to be agnostic to the inflation numbers and the IIP numbers. The reasons are not far to seek. IIP growth really may not make much sense when most sectors are already under strain and the lockdown is worsening things. The IIP numbers, as a result, may not be very useful from a policy perspective for the RBI. What the 11-month IIP number of 0.9% indicates is that the RBI may drive more of fiscal policy too by directing credit to specific sectors via banks. Even in the US, the Fed is driving the latest round of fiscal incentives worth $2.3 trillion for small businesses via easy loans.
Inflation could pose a unique policy challenge for the RBI. It is hard to say whether the lower inflation is due to tapering prices or due to an underlying shift towards an economic slowdown. Similarly, it is going to be hard to determine whether any spike in inflation could be due to helicopter money distributed or due to supply side bottlenecks. Till the time these discrepancies are sorted out, RBI may prefer to follow the global easy money model of keeping rates low and liquidity abundant.
Big question mark could be from March 2020 IIP
If the RBI Monetary Policy Report is anything to go by, the real question mark is what happens going ahead? The first picture will be clear when the March IIP numbers come out but that will still present only part of the worries. It is not just the lockdown but the collateral effects that need to be considered. Here are a few genuine IIP concerns.
- How soon will the lockdown be lifted and will it be lifted simultaneously or in a staggered manner?
- How much time it will take for Industrial outfits to get their factories back to full operations. A big challenge will be managing the demand and supply chain.
- Labour availability will still be a major issue as the displacement has been huge and it may take some time for labour to be fully available. This is likely to hit labour intensive sectors like transportation and construction.
- How will central and state level policy with respect to labour movement pan out? Also one needs to look at the impact on family incomes and demand. All this could have a bearing on IIP numbers in the coming months.