May IIP shows some respite, but stays in negative territory

With the lockdown getting extended till July 31, 2020 across most key industrial geographies, the pressure on IIP may continue for some more time.

Jul 13, 2020 08:07 IST India Infoline News Service

There was really not much of optimism surrounding the May IIP numbers as it was the second month of total lockdown due to COVID-19. However, May was supposed to be a relatively better month as factories had been allowed to function from the second week of May with appropriate safeguards. That was evident in the IIP numbers for May-20, which fell (-34.7%) on a YOY basis, compared to a (-55.5%) contraction in the month of April. The good news was evident in the MOM figures as May IIP showed a positive growth of 65% on a month-on-month basis. Of course, it may still be too early to celebrate as the next few months may be more reflective of the post-COVID trend in IIP.

With the lockdown getting extended till July 31, 2020 across most key industrial geographies, the pressure on IIP may continue for some more time. Like in April, the MOSPI has only revealed the index numbers and the growth (or the absence of it) has to be calculated using calculators and spreadsheets.

Chart Source: MOSPI

Like in the case of April IIP, MOSPI has started off with a caveat that the data of May-20 is not comparable with previous months. That is correct since the lockdown represents an event that is an aberration off the normal. However, it is hard to fathom the reason for not putting down the actual de-growth numbers in the MOSPI report. As can be seen from the chart above, the pressure on the IIP continues, almost in an unrelenting manner, but the extent of de-growth in May is not as worrisome as it was in April 2020. That may be the redeeming feature, although small consolation for the Indian economy.

Crux of the IIP lies in its components

As mentioned earlier, MOSPI has desisted from giving clear percentage de-growth numbers. However, the same can be easily calculated with the index numbers given. All the 3 segments of IIP continue to remain under pressure as shown in the table.

Weight Segment Base Index IIP Growth
0.1437 Mining 110.10 87.00 -20.98%
0.7764 Manufacturing 135.80 82.40 -39.32%
0.0799 Electricity 176.90 149.60 -15.43%
1.0000 Overall IIP 135.40 88.40 -34.71%
  Data Source: MOSPI

Mining and electricity with a combined weightage of 22.36% did not do too badly relative to the overall economy. For the month of May-20, mining activity compressed by (-20.98%) while electricity generation contracted by (-15.43%). Both these segments showed an improvement over the previous month. Non availability of labour and friction in logistics remain a challenge for these sectors.Manufacturing de-growth was (-39.32%) but that was still better than the (-64%) de-growth last month.

A clearer picture will emerge if we look at IIP in terms of specific products. There were some positive surprises. Pharmaceutical manufacturing was 3% higher in May-20 while chemicals and non-metallic minerals did not fall too sharply. Even food products and refined petroleum products did not fare too badly. On the negative growth front, some of the products that saw deep cuts in output were beverages, tobacco products, textiles, wood products, computers, electronic, electrical goods, heavy machinery, motor vehicles and transport equipment.

How does the user industry perspective stack up?

Looking at the IIP data through the lens of user industriesgives a much better insight into labour and supply chain issues hindering production.

Weight Segment Base Index Use Based IIP Growth
0.34 Primary Goods 131.90 105.50 -20.02%
0.08 Capital Goods 103.90 37.10 -64.29%
0.17 Intermediate Goods 138.80 77.60 -44.09%
0.12 Infrastructure / Construction 145.00 84.10 -42.00%
0.13 Consumer Durables 133.80 42.20 -68.46%
0.15 Consumer Non-Durables 149.80 132.30 -11.68%
  Data Source: MOSPI

Clearly, the cuts have been very sharp in some user industries, although the intensity is nowhere close to what it was in April 2020.In terms of user industries, capital goods and consumer durables continue to be under immense pressure. This is indicative that the revival in the capital investment cycle is some time away even as consumer driven demand boom looks unlikely for now. Consumer non-durables and primary goods have shown good traction in May compared to April and that gives some hope for the future. The big worry is that capital goods and infrastructure remain weak and both have strong multiplier effects on GDP growth.

Will there be Stimulus 3.0 from the government?

That is the billion dollar question! The government has already infused close to $300 billion via two rounds of monetary and fiscal stimulus. The government is working overtime to raise Rs.20,000 crore to fund another stimulus but at 5.5% fiscal deficit, the manoeuvring space is fairly limited. One thing appears to be amply clear. Rates are likely to remain low for quite some time till growth actually picks up to pre-COVID levels. For now, the IIP is not giving any clarity on how growth could pan out post the second quarter.

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