The positive shift in IIP in November had given some hope, but that appears to have been negated with the IIP dipping by (-0.30%) in the month of December 2019. It needs to be noted that unlike inflation data, IIP data is reported with a lag of one month.
Key drivers of weak IIP in December 2019
The MOSPI breaks up the IIP into 3 key components viz. Mining, Manufacturing, and Electricity. Needless to say, it is manufacturing that has the highest weightage in the overall IIP, and hence, the IIP normally tends to gravitate towards the Manufacturing IIP figure. For the month of December 2019, mining growth was at 5.4%, manufacturing growth at (-1.2%) and electricity generation at (-0.1%). Back in December 2018, all the three segments were in the green, which explains the sharp fall in IIP growth.
Out of the twenty three industry groupings in the index, sixteen industry groupings showed negative growth with only seven showing mild to sharply positive growth. The biggest negative growth was seen in computer, electronic, and optical products with negative growth of (-24.9%). In addition, the manufacturing of machinery also showed negative growth of (-20.3%), while printing and media also showed negative growth of -15.5%. There were some positive surprises too. Basic metals showed a positive growth of 14.2% while wood products showed positive growth of 13.2% for the month of December 2020. The bigger concern is on the 9-month data front. For the period Apr-Dec 2019, the growth in IIP was just 0.5%, compared to a much healthier 4.7% in the corresponding period last year.
But, there are reasons to be patient with IIP...
Prima facie, the IIP numbers may look disappointing on a monthly basis and also on a 9-month basis compared to the previous year. However, there are three things where the positive impact could be felt.
- The corporate tax cut announced in September 2019 from 30% to 22% may have helped companies become more profitable in the last two quarters. However, the 15% concessional tax for new manufacturing facilities is meant to boost production. That impact could be more pronounced in the coming months.
- Secondly, the government has allocated Rs130,000cr for rural infrastructure and jobs push and that could have a positive impact on output via expanded consumption route. Once consumption picks up, the low capacity utilization riddle will be automatically resolved and IIP should pick up in tandem.
- Global cues have not been too conducive and the Chinese stimulus worth $174bn combined with seamless transmission of rate cuts in India to the final borrower should contribute to the IIP picking up. In a nutshell, the green shoots are surely there for a pick-up in IIP.
For cues, look at the PMI numbers
Another way to look at the lead indicators for IIP is to look at the PMI Manufacturing and the PMI Services. For the month of January 2020, the PMI Manufacturing and the PMI Services were above the level of 55 and recorded a 7-year high. This is an extremely positive signal. For the Purchase Manager Index (PMI), the level of 50 is the line between expansion and contraction in manufacturing and in services. So, the PMI is not only indicating expansion but expansion with positive momentum.
PMI numbers have normally been smart lead indicators of growth because they consider order book flows, raw material purchases, and labor recruitment as key parameters and each of these are important lead indicators of an improvement in IIP. Therefore, the IIP for December 2019 may have contracted, but there is enough reason for hope and optimism. The green shoots of a revival in growth are definitely in place.