Jan-21 IIP slips into negative on manufacturing stress

The good news is that the IIP has remained in the positive zone for 3 out of the last 5 months.

Mar 15, 2021 09:03 IST India Infoline News Service

It was a case of manufacturing stress building into the IIP number as the Jan-21 IIP again slipped into the negative at -1.60%. The good news is that the IIP has remained in the positive zone for 3 out of the last 5 months. But there are more reasons to cheer. The revised estimates of IIP for Dec-20 and Oct-20 have been upgraded from original estimates. IIP growth for Dec-20 was upgraded from 1.04% to 1.56%. For Oct-20, the revised IIP estimates have been upgraded from 4.19% to 4.50%. That has raised hopes that we could also see an upgrade in Jan-21 IIP in the coming months. 

Data Source: MOSPI

IIP is showing signs of bottoming out

The Economic survey ahead of the Union Budget rightly pointed out that capacity utilization levels still need to pick up and that is contingent on demand. Even as demand is picking up, the pandemic has caused sustained disruption in the availability of labour and raw materials. That has capped IIP growth till date.

But there are some positive signs. For the December quarter, the GDP turned to positive, albeit marginal. At least, that disproves the recession worries after 2 consecutive quarters of negative GDP growth. One big trigger for IIP in the coming months will be the rapid implementation of Productivity Linked Incentives (PLI) scheme, which is expected to give a big boost to manufacturing sectors like auto components, chemicals, telecom equipment and IT hardware. That could be the trigger for IIP to pick up from here.

Break-up of the IIP basket components for Jan-21

Among the 3 components of IIP; mining contracted in Jan-21 but less than in Dec-21. The big disappointment was the Manufacturing Sector, which had bounced by 2.14% in Dec-20. However, in Jan-21 manufacturing contracted by -2.03%. Needless to say, manufacturing has the most significant impact on overall IIP due to its 77.64% weight in the IIP basket. Electricity generation was the star performer of Jan-21 growing at 5.53%, compared to 5.12% in Dec-20. But the real issue is with the slowdown in manufacturing, which dragged the IIP back into negative territory in Jan-21.
Weight Segment Base Index IIP Growth (Jan) IIP Growth (Dec)
0.1437 Mining 124.30 119.70 -3.70% -4.22%
0.7764 Manufacturing 137.90 135.10 -2.03% +2.14%
0.0799 Electricity 155.60 164.20 +5.53% +5.12%
1.0000 Overall IIP 137.40 135.20 -1.60% +1.56%
Data Source: MOSPI

For the first 10 months of fiscal 2021 (Apr-Jan) cumulative IIP stands at -12.2% yoy. This will be the real challenge if the government has to meet its GDP estimates of -7.7% for FY21. It will certainly call for a sharp bounce in IIP in next 2 months. That would be critical for narrowing the negative gap in FY21 and to meet the ambitious targets of +12.5% for FY22.

What were the manufacturing leaders and laggards?

Here is a quick take on the gainers and losers in the manufacturing basket for Jan-21. Positive growth was visible in Wood Products (+6.9%), rubber and plastic (+6.3%), transport equipment (+4.7%) basic metals (+4.2%) and chemicals (+3.1%).

A larger number of product categories saw contraction in output. These included, Apparel (-20.2%), recorded media (-18.3%), furniture (-18.0%), paper products (-12.5%), pharmaceuticals (-11.5%), tobacco products (-10.8%), beverages (-8.5%), machinery & equipment (-7.6%), minerals (-6.1%) and leather products (-4.9%).

For the Apr-Jan period, the overall contraction in IIP was -12.2%, cumulatively better than previous month by 130 bps. However, not a single segment showed positive growth in the 10-month period; with the best being pharma contracting at -1.1%.

IIP through the user-industry lens for Jan-21

The IIP data when evaluated from the perspective of user industries gives a better picture of the demand momentum driving IIP growth.

Weight Segment Base Index IIP Growth (Jan) IIP Growth (Dec)
0.34 Primary Goods 133.40 133.70 +0.22% -0.31%
0.08 Capital Goods 102.40 92.60 -9.57% +0.64%
0.17 Intermediate Goods 146.80 147.60 +0.54% +0.41%
0.12 Infrastructure / Construction 146.70 147.10 +0.27% +0.89%
0.13 Consumer Durables 124.00 123.70 -0.24% +4.86%
0.15 Consumer Non-Durables 158.30 147.50 -6.82% +1.96%
Data Source: MOSPI

Primary goods, intermediate goods and infrastructure are at par with the previous month. The pressure comes from user segments of capital goods and consumer non-durables and to a lesser extent from consumer durables. That is not great news because it signals slowdown in demand at the corporate and retail end. The next few months could be critical.

How will RBI address this growth dichotomy?

The RBI would find itself addressing two diverse forces. Bond yields are going up sharply and the US FOMC is expected to hint at a taper and a possible rate hike in its next meeting. The IIP data is hardly giving confidence to the RBI to change its accommodative stance. Monetary divergence is not an answer so the best situation for the RBI would be that FOMC holds its accommodative stance and puts off taper plans. For now, a lot will predicate on the next FOMC meet!

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