IIP growth for Jul-20 improves but stays in contraction zone

Industrial production, is finally back to 90% of pre-COVID levels.

Sep 14, 2020 08:09 IST India Infoline News Service

That the IIP is in contraction mode is evident from the fact that the IIP growth has been negative for 8 out of the last 12 months. That is virtually an indication of industrial slowdown. July was the fifth consecutive month of de-growth in IIP and that is not great news. But the positive story is that the contraction in IIP is nowhere close to what it was in April and May. It is in this context that the (-10.4%) contraction in IIP in Jul-20 must be read.

In the last two months, the revised estimates of IIP are seeing upgrades. The Jun-20 IIP growth (RE) has been upgraded from (-16.6%) to (-15.78%), which is considered in our analysis. While this looks like a sea of red; what is encouraging is the way the trend-line has shown a rebound. Industrial production, is finally back to 90% of pre-COVID levels.

Chart Source: MOSPI

Real challenges lie in the road ahead

At the outset, it is hard to fathom why the MOSPI is still persisting with giving absolute index numbers instead of calculating the item-wise growth/de-growth and presenting the same. The slowdown is, by now, well known and adequately documented. That is more of an aside! The chart shows that the pressure on IIP continues despite the phased unlocking of the economy. There are 2 challenges in the road ahead. Firstly, demand could still be an issue unless bank funding gets back to previous levels. That may be difficult in the midst of an extended moratorium. Secondly, the supply chain and labour bottlenecks are still a reality and that may take longer to normalize.

How the key segments of IIP panned out in Jul-20

While the MOSPI has desisted from giving clear percentage de-growth numbersthe segment-wise growth can be calculated based on a YOY comparison. Here is how the segmented IIP performance of mining, manufacturing and electricity looks like for Jul-20.

Weight Segment Base Index IIP Growth
0.1437 Mining 100.20 87.20 -12.97%
0.7764 Manufacturing 133.70 118.80 -11.14%
0.0799 Electricity 170.50 166.30 -2.46%
1.0000 Overall IIP 131.80 118.10 -10.39%
 Data Source: MOSPI

There was clear improvement in performance across the 3 segments of IIP during July 2020. Mining with a weightage of 14.37% performed much better than Jun-20. Clearly, the challenges to labour and transportation are under control as mining output touched 87% of pre-COVID levels. Therewas visible improvement in the manufacturing sector with output back at 90% of pre-COVID levels. This was singularly responsible for the improvement in the IIP momentum. Electricity showed solid traction; operating at 98% of pre-COVID levels.

IIP winners and laggards for Jul-20

Let us look at IIP growth in terms manufactured products, which is diverse and has the highest weightage of 77.64% in IIP. Positive surprisescame in the form of encouraging growth or limitd contraction. The big positive boost came from a 22% growth in pharma output in Jul-20. Sectors like food products, chemicals, rubber and plastics are almost back to last year’s levels.

Negative growth items continue to outnumber. Some of the products that saw deep cuts in output includedbeverages, textiles, apparel, wood products, paper, furniture, electrical equipment, machinery, motor vehicles and transport equipment. In most cases, contraction in Jul-20 was more than 20%.

How the user industries stacked up for Jul-20?

The IIP data can also be tweaked to look from the lens of user industries. This gives an idea of whether the improvement in momentum is sustainable.

Weight Segment Base Index Growth (Jul-20) Growth (Jun-20)
0.34 Primary Goods 128.10 114.10 -10.92% -14.55%
0.08 Capital Goods 91.80 70.90 -22.76% -36.90%
0.17 Intermediate Goods 140.40 122.90 -12.46% -25.13%
0.12 Infrastructure / Construction 140.10 125.20 -10.64% -21.27%
0.13 Consumer Durables 130.30 99.50 -23.63% -35.47%
0.15 Consumer Non-Durables 146.60 156.40 +6.68% +13.99%
  Data Source: MOSPI

User groups like capital goods, intermediate goods and infrastructure are more relevant to industrial output. These three user groups have seen the sharpest improvement in momentum, withoutput back to almost pre-COVID levels. There was disappointment in consumer non-durables. Growth was still positive, but momentum appears to be wilting. That could be more of a demand issue but the good news is that sectors with multiplier effect are showing traction.

Real good news is in sequential numbers

The crux of the IIP story for July 2020 is that output is now getting back to pre-COVID levels. Five months of negative IIP is really discouraging but the good news may be in the sequential numbers. For example, if you look at the sequential MOM numbers for the 3 segments, the results are fairly encouraging. Sequential growth in the IIP components stand at +1.87% for the mining sector, +9.59% for the manufacturing sector and +6.47% for electricity generation. As a result, the overall IIP has shown a positive sequential growth of +9.93%. That could be the big news that hints at IIP getting back to normal levels soon!

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