Jan-22 IIP bounces back to 1.32% on low base effect

14 Mar 2022 , 09:40 AM

The month of January 2022 marks the 11th consecutive month of positive IIP growth for the Indian economy. After the Omicron scare of November and December 2021, it looks like January has finally  gotten over that overhang. The consensus estimates for IIP had been pegged in the range of 1.2% to 1.4% but actual IIP growth largely benefited from the low base effect of the corresponding month last year. That is likely to continue for Feb-22 also.

Data Source: MOSPI

The last one year can be broadly classified into 3 phases. In the first phase between Mar-21 and May-21, IIP growth represented the classic outlier effect due to an inordinately low base effect. The period from Jun-21 to Aug-21 represented a period of sustained normalization as base effect normalized and growth was based on merit. IIP from Sep-21 onwards was more of normalized long term IIP growth. However, there was a temporary blip in Nov-21 and Dec-21 due to the Omicron lag effect. It remains to be seen if IIP can now show momentum post Jan-22 to bounce back from the Omicron effect.

How does the 10-month cumulative picture for FY22 look?

With the Jan-22 IIP announced, we have credible data for the first 10 months of FY22. During this 10-month period, the cumulative IIP has grown by 13.7% yoy. But how does the picture look compared to the 2-year ago FY20 10-month period? That offers a more realistic picture as it compares with the pre-COVID levels. Compared to pre-COVID levels, cumulative IIP for first 10 months is just about 0.06% higher compared to the corresponding 10 months period from Apr-19 to Jan-20. India has just inched back above the pre-COVID levels.

Let us talk about the upgrades / downgrades to previous IIP estimates and they presented a positive picture overall. The final IIP estimate for Oct-21 was upgraded by 16 bps from 4.01% to 4.17%. At the same time, the first revised estimate for Dec-21 has also been upgraded by 29 bps from 0.44% to 0.73%. With the Omicron effect waning and economic activity (including contact sensitive sectors) returning to normalcy, it looks like even the Jan-22 IIP number may be ripe for further upgrades in its first and final revisions.

How does the break-up of cumulative IIP for FY22

We have 10 data points on IIP for FY22 i.e. Apr-21 to Jan-22. Let us focus on the 3 key IIP components of mining, manufacturing and electricity and evaluate their cumulative performance during this period. Mining growth for 10 months stood at 14.2%, manufacturing growth at 14.3% and electricity generation growth stood at 8.5% on a yoy basis. This is a comparison of the Apr-21 to Jan-22 period with the Apr-20 to Jan-21 period. The overall IIP growth in the first 10 months of FY22 was 13.7% yoy.

The above analysis could again be the victim of the base effect mirage. A better way is to look at cumulative FY22 (Apr-Jan) data and compare it to the cumulative FY20 (Apr-Jan) period. On a 2 year basis, mining sector was up 2.89%, manufacturing output was still lower -1.02% while electricity was up 5.57%. Overall IIP for the Apr-Jan period was marginally higher by 0.06%, but you can say it was virtually at par with pre-COVID levels. The pressure is coming from negative growth in manufacturing sector, due to its predominant weightage of 77.64% in the IIP basket.

Momentum focus on the January 2022 IIP traction

We can break up the 1.32% Jan-22 IIP growth into mining, manufacturing and electricity. We also compare with 2-year ago period to get a picture of structural direction of growth.

Weight	Segment	IIP Index Jan-22	IIP Index Jan-21	IIP Growth Over Jan-21	IIP Growth Over Jan-20
0.1437	Mining	124.70	121.30	+2.80%	+0.33%
0.7764	Manufacturing	138.10	136.60	+1.10%	+0.19%
0.0799	Electricity	165.60	164.20	+0.85%	+6.45%
1.0000	Overall IIP	138.40	136.60	+1.32%	+0.69%

  Data Source: MOSPI

IIP growth reported by MOSPI is a yoy number and, hence, vulnerable to base effect. This makes growth look optically attractive but largely deceptive. However, this effect can be neutralized by looking at 2-year change in the IIP figure to avoid the low base effect bias. This gives a much clearer picture of the growth over the pre-COVID levels and is therefore more credible as a data point as it compares two normalized economic situations.

Incidentally, the 2-year numbers look a little tepid for Jan-22 compared to Dec-21 as manufacturing with the highest weightage has been under pressure in Jan-22. One reason for this tepidness is also that Dec-19 period was a weak base period and hence the 2 year growth is beginning to look strong. We have to await more evidence from the high frequency data points like GST collections, PMI  Manufacturing, PMI Services, e-way bills etc before we can conclude that the Omicron effect has been finally consigned to the flames.

Going ahead, the focus will shift from IIP to consumer inflation

Last month in Feb-22, the Monetary Policy Committee (MPC) had announced its bi-monthly monetary policy just a day ahead of the IIP announcement. At that point growth fears were embedded. One of the key reasons offered by the RBI for not hiking repo rates or reverse repo rates was due to weak private consumption. That has been the case with Jan-22 IIP also. However, the stance is likely to be different or, at least, in the April monetary policy the focus would be more on inflation control and less on boosting growth.

So, what will be the stance of the April 2022 monetary policy. We could see the first rate hikes in a long time, more so if the US Fed embarks on its first rate hike in its March FOMC meet. For now, that is what the CME Fedwatch is indicating. In the previous note, we had suggested that the RBI may put off its hawkish actions from February to April 2022. However, the way the war situation has panned out and inflation has spurted, especially energy inflation, a rate hike in Apr-22 almost looks inevitable.