But there are encouraging signals too. The annual contraction in IIP for Aug-20 is just about (-8%); which means production is back to almost 92% of pre-COVID levels. The real challenge may be pushing IIP from these levels as the lag effect of labour shortages and supply chain bottlenecks are unlikely to go away in a hurry. If one looks back since August 2019, we have had 9 out of 13 months of negative IIP growth. In fact, for the first five months of fiscal 2020-21 (Apr-Aug), the IIP contraction remains as bad as (-25%).
Can the data get clearer please?
The previous IIP reports of MOSPI used to be informative and comprehensive. However, ever since the contraction began in March this year, the government has changed tack and opted to just give the raw index numbers leaving it to the users to do the growth calculations. That is not too difficult, but the question why is the government shying away from talking about the slowdown. Even the man on the street understands that this contraction is due to factors beyond the control of most governments. One can only hope that from the coming month the IIP reports again become comprehensive and transparent.
How the key segments of IIP panned out in Aug-20
The table below captures the 3 principal components of IIP and how they have performed on a yoy basis. What we have also done is to juxtapose the August growth with the July growth to give a bird’s eye view.
|Weight||Segment||Base||Index||IIP Growth (Aug)||IIP Growth (Jul)|
There is improvement on all fronts in August over July. That is the progressive impact of economic activity returning to normal levels. In Mining, manufacturing and electricity, the contraction in August has been less stinging as compared to the contraction in July. However, like in the previous months, the overall contraction has gravitated towards the performance of the manufacturing sector as it has a 77.64% weight in the IIP.
In Aug-20, there were some IIP winners and some losers too
We focus on the manufactured products since it has the highest weightage in the overall IIP index. We focus on products showing positive growth as well as products where the contraction is substantially lower than the Apr-Aug average. Tobacco products have shown positive growth of 2.9% in Aug-20 while basic metals were marginally in the positive at 0.1%. Transport equipment managed to grow output by 1.7%. In the case of chemicals and pharmaceutical products, there is marginal contraction on a yoy basis but the momentum is favorable compared to July. Even metal products have shown traction on the back of demand from China and Vietnam.
There are a number of major industries like wood and paper products where the contraction is more than (-30%). Products like apparel, recorded media, petroleum products and furniture are down more than 20% on a YOY basis.
How user industries stacked up for Aug-20?
The IIP data can also be tweaked to look from the perspective of user industries. This gives an idea of whether the improvement in momentum is sustainable.
|Weight||Segment||Base||Index||Growth (Aug-20)||Growth (Jul-20)|
|0.12||Infrastructure / Construction||130.70||127.70||-2.30%||-10.64%|
There is good news from user groups like capital goods, intermediate goods and infrastructure where the contraction hasmellowed. Even in consumer durables, the contraction is much lower than the previous month. However, the one disappointment was consumer non-durables where the user analysis shows contraction after two consecutive months of positive growth.
RBI has enough reasons to keep the monetary stance accommodative
When the RBI announced the monetary policy on 09 October, the MPC made an interesting statement that it would be willing to keep the policy accommodative for as long as warranted. The policy went a step ahead to underline that they saw the policy as accommodative well into 2021. What does that mean?
The bounce from the lows of April was all about momentum; now it will have to address practical problems like weak demand, supply chain constraints and labour shortages. The promise to keep monetary policy accommodative stems from the belief that growth recovery would be a lot tougher. The next few IIP announcements could be critical.