IIP back to positive growth in Dec-20, but expect a tough ride ahead

The RBI Financial stability report or FSR highlighted that overall capacity utilization in Indian manufacturing had moved up sharply since April 2020.

Feb 15, 2021 08:02 IST India Infoline News Service

IIP has been in positive territory for 3 out of the last 4 months. However, the IIP growth is still too negligible to be considered a veritable trend. There have also been some revised estimates of IIP for the previous months. For example, IIP contraction for Nov-20 deepened from -1.94% to -2.10. However, for the month of Sep-20, the IIP growth has been upgraded from 0.49% to 0.98%. At the same time, August IIP contraction has been upgraded from a level of -8.64% to -7.13%. 

Data Source: MOSPI
Can IIP support 11% GDP growth in FY22?

The RBI Financial stability report or FSR highlighted that overall capacity utilization in Indian manufacturing had moved up sharply since April 2020. That is evident in the IIP moving from contraction of -57.31% in April 2020 to almost +1% growth by Sep-20. The combination of fiscal and monetary stimulus, even at the cost of a yawning fiscal gap, has worked for IIP.

But some immediate concerns persist on the IIP front. For example, the RBI FSR warned that the NPA trajectory could double in next one year. That is likely to make banks more conservative; impacting credit flow to the economy. But the bigger challenge is the economic recovery. GDP contraction of -7.7% in FY21, is almost axiomatic. But, if the economy has to recover to the projected 11% growth in FY22, IIP growth has to play a pivotal role. We are yet to see evidence of that.

Breaking up the IIP components for Dec-20

Among the 3 components of IIP; mining continues to show negative growth in Dec-20 too. In fact, mining continues to be in the negative though there is improvement over Nov-20. Manufacturing bounced back into positive territory in Dec-20 and that is critical considering its weight of 77.64% in the IIP basket. Electricity generation has remained the star performer of Dec-20, showing robust growth and improving upon the Nov-20 performance. Overall IIP has gravitated towards manufacturing growth due to its dominant weightage.
Weight Segment Base Index IIP Growth (Dec) IIP Growth (Nov)
0.1437 Mining 120.90 115.10 -4.79% -6.65%
0.7764 Manufacturing 135.40 137.50 +1.55% -1.99%
0.0799 Electricity 150.30 158.00 +5.12% +3.50%
1.0000 Overall IIP 134.50 135.90 +1.04% -2.10%
  Data Source: MOSPI

For the first 9 months of fiscal 2021 (Apr-Dec) cumulative IIP stands at -13.5% yoy, 200 basis points better than in Nov-20. If the government has to meet or improve upon the advance GDP estimates of -7.7% for FY21, a sharp bounce in IIP in next 3 months combined with improvement in services sector is inevitable.

Manufacturing in Dec-20; the major gainers and losers

Here is a quick take on the manufacturing basket. Positive growth was visible in Computer and Electronics (+18.9%), Electrical Equipment (+8.1%), Chemicals (+7.2%), Pharmaceuticals (+6.8), rubber and plastics (+6.3%), motor vehicles (+5.4%) and basic metals (+4.2%).

A number of product categories also saw contraction in output. These included, Printing and Media(-27.1%), Apparel (-20.0%), Paper (-17.4%), Beverages (-9.2%), textiles (-7.2%) and non-metallic products (-6.6%).

If you consider the Apr-Dec period, the overall contraction in IIP is -13.5% with almost all products showing negative growth and only pharmaceuticals segment growing +0.4% growth in the period.

User industry analysis for Dec-20

The IIP data can also evaluate growth from the perspective of user industries to give a better picture of the demand scenario driving IIP growth. This gives an idea of whether and where the momentum is sustainable.

Weight Segment Base Index IIP Growth (Dec) IIP Growth (Nov)
0.34 Primary Goods 129.60 129.20 -0.31% -2.57%
0.08 Capital Goods 93.70 94.30 +0.64% -7.14%
0.17 Intermediate Goods 146.90 147.50 +0.41% -2.98%
0.12 Infrastructure / Construction 146.40 147.70 +0.89% +0.74%
0.13 Consumer Durables 117.30 123.00 +4.86% -0.69%
0.15 Consumer Non-Durables 158.10 161.20 +1.96% -0.19%
  Data Source: MOSPI

There seems to have been a major positive shift in the IIP across all the user segments in the month of Dec-20. In Nov-20 only infrastructure / construction was positive in terms of user industry growth while the other five were negative. In Dec-20 only primary goods are marginally in the negative with all the other segments being in the positive. How much this trend can sustain, will hold the key to the GDP achieving 11% growth in FY22.

How will the RBI react to the IIP numbers

Since the monetary policy of Oct-20, the RBI has maintained a consistent stance that growth will drive rate policy and monetary stance. That has been underlined in the policy statement and is also evident in the minutes of the MPC. The IIP figure for Dec-20 has again shown traction in Dec-20 and that is the good news. Whether this bounce can really sustain or is it just base effect, will be evident in the next few months. The RBI and the government will surely be looking at IIP as the magic wand for the estimated 11% GDP recovery of FY22.

Related Story

Open Free Demat Account (Rs699)