IIP contraction continues in Jun-20 but momentum back to March levels

The good news was evident on a progressive basis as Jun IIP showed a positive growth of 20.45% on a sequential basis compared to May.

August 12, 2020 9:00 IST | India Infoline News Service
The IIP contraction story continued in Jun-20 with the Indian economy recording the fourth consecutive month of de-growth in IIP. However, the trend in June is showing positive momentum compared to April and May. That was evident in the IIP numbers for Jun-20, falling (-16.6%) on a YOY basis, compared to May-20 at (-34.7%) and Apr-20 at (-55.5%). The good news was evident on a progressive basis as Jun IIP showed a positive growth of 20.45% on a sequential basis compared to May.

The MOSPI is right in pointing out that the Jun-20 IIP number may not be comparable due to the lockdown effect and the lag effect of supply chain disruptions. However, what is confounding is that MOSPI continues to reveal only the index numbers and the growth figures have to be calculated using spreadsheets.

Chart Source: MOSPI
As is evident from the chart, the relentless pressure on IIP continues. However, most businesses are still operating under partial capacity utilization and social distancing norms so there is an outer limit to production. However, the positive trend in the Jun-20 IIP number is that the de-growth is almost back to the pre-COVID levels seen in Mar-20. But, it also means that the real challenge will start from here. If demand does not pick up quickly and the supply chain disruptions continue, getting IIP back to growthposes big challenge.

How the 3 principal components of IIP panned out in Jun-20

Like in the previous months, MOSPI has desisted from giving clear percentage de-growth numbers and left it to the readers to calculate the same. The table below captures the segmented IIP performance of mining, manufacturing and electricity.

Weight Segment Base Index IIP Growth
0.1437 Mining 106.50 85.40 -19.81%
0.7764 Manufacturing 129.00 106.90 -17.13%
0.0799 Electricity 173.60 156.20 -10.02%
1.0000 Overall IIP 129.30 107.80 -16.60%
  Data Source: MOSPI

Mining with a weightage of 14.37% performed almost at par with May-20. Labour shortages continued to plague the mining sector which explains why the performance could not improve meaningfully. The real improvement in momentum was seen in the manufacturing sector. The compression in manufacturing was only (-17.13%) in Jun-20; less than half of the manufacturing contraction seen in May-20. This was singularly responsible for the lower contraction in IIP in Jun-20 as manufacturing accounts for 77.64% of IIP. Electricity also witnessed improvement; contracting just (-10.02%) in Jun-20.

Sectors that drove the IIP movement in Jun-20

A clearer picture emerges if we look at IIP in terms of specific products. While mining and electricity generation are more uni-dimensional in nature, it is manufacturing that has a number of sub-components showing varying trends. There were some positive surprises for sure; either in the form of positive growth or low negative growth. The big positive surprise came from a 34.6% growth in pharma output in Jun-20. Tobacco production also showed 4.5% growth in Jun-20. Then there were sectors like food products, chemicals and non-metallic minerals; where output is back to last year’s levels.

On the negative growth front, some of the products that saw deep cuts in output include beverages, textiles, apparel, wood products, paper products, fabricated metals, electrical equipment, machinery & equipment, motor vehicles and transport equipment. In most of these cases, the contraction in Jun-20 was in excess of 30%.

How the user industry perspective stacks up for Jun-20?

Looking at the IIP data through the lens of user industriesgives a much better insight into whether the improvement in momentum is sustainable.

Weight Segment Base Index Use Based IIP Growth
0.34 Primary Goods 127.80 109.20 -14.55%
0.08 Capital Goods 101.90 64.30 -36.90%
0.17 Intermediate Goods 136.50 102.20 -25.13%
0.12 Infrastructure / Construction 140.60 110.70 -21.27%
0.13 Consumer Durables 120.00 77.44 -35.47%
0.15 Consumer Non-Durables 138.00 157.30 +13.99%
  Data Source: MOSPI

There are two trends visible in the month of Jun-20. Firstly, the specific user groups like capital goods and infrastructure groups have seen an improvement in momentum with much lower contraction compared to May-20. The second big trend is that we finally, have one segment i.e. consumer non-durables where the growth has turned positive, hinting at robust consumer demand for FMCG products. Of course, capital goods and infrastructure will have to improve if the multiplier effect of growth has to come into play.

Finally, a look at the capacity utilization levels

Chart Source: Trading Economics

As India enters the fourth successive month of IIP contraction, it is hoped that possibly July should be the last month that IIP contracts. If that has to happen, the real link will be the capacity utilization. AT 68.5%, capacity utilization is at its lowest in more than 12 years. The fall has been precipitous in the last one year; falling from 77% to 68.5%. That is the one parameter that needs to improve and that would call for greater demand and a quick resolution to supply chain bottlenecks.

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