In our March 2021 IIP report, we had estimated that the IIP chart will increasing start looking like a mirror reflection of the year-ago period, which is evident from the chart above. If you remove the impact of the fall in the base month, it is evident that the IIP in Apr-21 is almost at the same level as it was in Apr-19. That almost makes it look like 2-years of lost growth, which is what has actually happened. But there is one more angle to the story. It also indicates that the IIP is also showing strains of COVID 2.0 and the lag effect could persist longer. The base effect will continue to save the blushes for another 3-4 months.
Data flow partial, but upgrades nevertheless
At the outset, the National Statistical Office has conceded that the data for April 2021 may not be comprehensive as it only reflects part of the data due to the lockdown. A clearer picture may only emerge once more data points emerge and that would only be possible after the lockdowns are completely lifted. Hence, for now, the April 2021 IIP must be treated more as a reliable approximation and subject to changes in the coming months.
On the data revision up front, they continue to be favourable. For the month of March 2021, the first IIP revision has come in and it has upgraded the IIP from 22.35% to 24.14%. At the same time, the second revised estimate of January 2021 revised the IIP from a contraction of -0.87% to -0.58%. That surely gives hope that the data for April could also be upgraded, despite growing sharply, to begin with. The moral of the story is that as more data points emerge, they only reiterate the underlying growth story.
Is the IIP really growing over pre-COVID levels?
At the outset, if we break up the 134.44% IIP growth into traditional mining, manufacturing, electricity classification; it is no rocket science that the growth would be phenomenal across the 3 segments. To get a more realistic picture, we break up the IIP into the 3 components but look at growth on a YOY basis and also on a 2-Year growth basis. The latter will give an approximate picture of whether the output has been able to get back to pre-COVID level.
Data Source: MOSPI
When the core sector data for Apr-21 was announced on 31 May, the DIPP had given a sequential analysis of de-growth despite the yoy number showing flattering growth. Similarly, when the MOSPI announced the IIP data, it has provided a 2-year IIP analysis to give an idea of the COVID impact. That is proactive data presentation and is a welcome signal that the government is willing to live with the reality of the data points.
Now for the numbers. Let us start with mining. YOY mining IIP is up 38.46%, but when compared to Apr-19, the growth is a paltry 0.19%. Manufacturing is actually disappointing. While yoy IIP is up 197.15% due to the base effect, the IIP is actually lower by -0.87% compared to Apr-19. In short, manufacturing with its 77.64% weightage, is yet to recoup pre-COVID levels. The one area where there has been genuine growth over pre-COVID levels is electricity generation. However, if you look at the overall IIP on a 2-year basis, the growth is just about 0.08%. In short, COVID-2.0 is putting pressure on the manufacturing IIP.
Does Apr-21 IIP imply that RBI sustains its accommodative stance?
One can broadly surmise that with this kind of IIP data, where the predominant manufacturing IIP is still short of pre-COVID levels, the RBI would not be too keen to either consider rate hikes or change the accommodative monetary stance. There is a big dilemma in that the optimism of the stock markets is not shared by the IIP data. In between, the RBI liquidity is filling the gap. For the RBI, the accommodative monetary promise is becoming like a tiger ride. It is getting tougher to sustain but too dangerous to dismount. For now; it looks like monetary accommodation by the RBI will continue!