To be fair, there were some favourable revisions in IIP data of previous months. For example, IIP for Feb-21 was upgraded from -3.58% to -3.43%. Similarly, for Dec-20, the revised IIP estimates were upgraded from +1.56% to +2.16%. That gives hope that the Mar-21 number could also improve, although the base effect is largely factored in.
Base effect offsets some of the strain of COVID 2.0
In Mar-21, it is a combination of manufacturing and electricity generation that boosted the IIP. Despite the base effect, the mining growth has been relatively subdued. In a sense, the base effect appears to have offset some of the strain of COVID 2.0. Since the period from March to July 2020 was extremely weak in terms of IIP growth, the base effect is more than making up for the pain of COVID 2.0. At least, optically, the strains of COVID 2.0 are not visible as of now.
To maintain this IIP growth, the 2 key challenges on the supply side have to be addressed. On one hand, there is the steady rise in price of inputs like metals, alloys, minerals and oil. Secondly, capacity utilization stuck at 55-60% exacerbates the fixed cost challenge.
3-factor analysis of the Mar-21 IIP numbers
Among the 3 components of IIP; mining relatively disappointed in Mar-21 with +6.11% growth, despite the advantage of the base effect. The big bounce came from manufacturing, where growth bounced back to 25.81% in Mar-21. Manufacturing accounts for 77.64% of the IIP basket, so this is the number that IIP gravitates towards. Electricity generation was a solid performer in Mar-21 growing at +22.53% growth. Of course, as the base effect wears thin, it would be the handling of COVID-2.0 that would make the difference.
|Weight||Segment||Base||Index||IIP Growth (Mar)||IIP Growth (Feb)|
For FY21 (Apr-Mar) cumulative IIP stood at -8.6% yoy. Thanks to the base effect in March, this figure has tapered close to the median GDP contraction target for FY21. The action, needless to say, will shift to effectiveness of the government inoculation program so that growth impulses can be optimized in FY22.
Leaders and laggards within the manufacturing pack
Here is a quick take on the gainers and losers in the manufacturing basket for Mar-21. Positive growth was visible in Computer Electronics (+74.7%), electrical equipment (+50.3%), furniture (+48.7%), rubber & plastic products (+46.7%), wood products (+45.4%), machinery & equipment (+41.3%), pharmaceutical products (+35.2%), fabricated metal products (+34.5%), transport equipment (+31.4%) and paper products (+29.5%).
Obviously, when the IIP has grown 22.35%, you don’t have too many laggards. However, there still are a handful of them. These included, tobacco products (-4.6%), recorded media (-3.1%) and coke & refined petroleum products (-1.6%).
For FY21, the overall contraction in IIP was -8.6%. However, the only sector to show positive growth in fiscal year FY21 was the pharmaceuticals sector at +1.5%.
How will the Mar-21 IIP number impact RBI rate stance?
The April monetary policy was quite emphatic that repo rates would not be tinkered with and accommodative stance would continue till growth impulses were back. For that conviction, the Mar-21 IIP does not make much of a difference as it is purely a base effect phenomenon. At a macro level, if the government wants to push GDP growth in FY22 close to 10%, the only option is benign rates and an accommodative policy stance. The real challenge for the RBI stance will come from US inflation.
It is now apparent that global markets were unwilling to buy the Fed story of sustained low inflation and low rates. That apprehension was substantially justified by inflation shooting up to 4% in the US. The moral of the story is that the focus may now shift from growth impulses to price stability. To begin with, RBI may be constrained to slow down the liquidity taps and follow up with rate hikes at a later stage. The surge in US inflation has created a new problem for RBI as it brings inflation to centre-stage and reduces the importance of economic growth. For now, the base effect is likely to help IIP growth stay robust.