March IIP growth dips to life-time lows; focus shifts to recovery

It needs to be remembered that the lockdown in the month of March was only effective from the last week. Despite that, the IIP falling by (-16.7%), is clear sign of structural stress.

May 13, 2020 08:05 IST India Infoline News Service

The first indications of stress in March IIP numbers came when the core sector for March fell by (-6.5%). Core sector constitutes over 42% of IIP and is normally a solid lead indicator. But the negative growth displayed for the month of March 2020 at (-16.7%) was worse than most expectations. The chart below captures the monthly IIP trend for FY20.

Data Source: MOSPI

It needs to be remembered that the lockdown in the month of March was only effective from the last week. Despite that, the IIP falling by (-16.7%), is clear sign of structural stress.

How the IIP break-up looks like?
The MOSPI has already cautioned in its note that data collection on IIP was constrained due to the COVID-19 lockdowns. It has guided that actual IIP figures could be substantially different from the provisional figures shared. If you look at the month of March, the Mining sector showed growth of 0% but showed positive growth of 1.7% for fiscal 2019-20. Manufacturing accounts for 77.63% of the IIP and that saw negative growth of (-20.6%) while full year manufacturing showed negative growth of (-1.3%). Electricity generation also showed (-6.8%) shrinkage for March but managed to grow at 1.1% for fiscal year 2019-20. At an overall level, IIP for March showed contraction of (-16.7%) while IIP for the full year contracted at (-0.7%). March IIP is the lowest monthly growth in Indian history. Clearly, IIP tends to gravitate towards manufacturing number considering its 77.63% weight in the IIP.
 
Which products led the IIP and which products lagged?
With an overall IIP contraction of (-16.7%), there is no rocket science in inferring that there would be hardly any product groups with positive growth. In fact, there were none with all the 21 broad industry groups showing negative growth. In terms of specific products, some managed to resist the fall better than others. For example, products like beverages, coke and refined petroleum products showed contraction of (-6.4%) and (-1.8%) only, respectively. Among the major product laggards in the IIP basket, motor vehicles & trailers contracted by (-49.4%), furniture by (-44%) and computer & optical products at (-41.7%). In all these products, the growth damage has been huge. Most of the other products in the IIP basket contracted between 20% and 30% on a YOY basis.

Looking at IIP from a user perspective
Another way to look at the IIP number is through the end-use approach. The table below captures the gist of IIP contraction on an end-user basis.
End User Category Mar-20 – IIP Growth FY2019-20 IIP Growth
Primary Goods (-3.10%) +0.80%
Capital Goods (-35.60%) (-13.70%)
Intermediate Goods (-18.50%) +8.80%
Infrastructure & Construction Goods (-23.80%) (-4.00%)
Consumer Durables (-33.10%) (-8.40%)
Consumer non-Durables (-16.20%) +0.50%
Data Source: MOSPI

Barring primary goods, the end user growth has been deeply negative for all the other categories. The negative growth in capital goods and consumer durables were below (-33%). This indicates two things. Firstly, the capital cycle revival is still some time away and till then manufacturing will be under pressure. Secondly, the deep cuts in consumer durables show the strain on demand as the sustained lockdown has taken its toll on income levels and purchasing power. Most purchase decisions are being postponed and that could also be an early indicator of likely stress on consumer debt.

CPI inflation announcement put off
In an interesting move the government did not announce the CPI inflation figure for April 2020. The government perspective was that inflation figures for April may not be reliable due to the sustained lockdown in April. The CPI inflation is a key decision point for the RBI and even analysts and economist prefer to look at inflation and IIP as a combination. With retail inflation not being announced, that important insight is lost. Remember, IIP always comes with a lag of one month. This could also have some interesting implications. It is very likely that the MOSPI may choose to skip announcing the April IIP in June as it would again give a much distorted picture. But we will have to wait for June 12 to get a clear picture on that front.

March IIP is done and dusted and the focus now shifts to the future outlook. If March 2020 IIP was at (-16.7%), then April and May would clearly be a whitewash. It is in these conditions that the focus shifts to the fiscal stimulus 2.0 announced by the Prime Minister on 12th May. The overall fiscal stimulus of Rs.20 trillion is surely an impressive number but it needs to be seen in the global context where $15 trillion has already been infused as stimulus. FM’s detailed timetable and implementation will hold the key to an IIP revival. The focus has to clearly be on recovery; quick, sharp and solid!

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