Nov-20 IIP retreats back into negative growth mode

After recording positive IIP growth of +4.19% in Oct-20, the IIP fell to -1.94% in Nov-20.

January 13, 2021 7:57 IST | India Infoline News Service
If September and October were the months of celebration with positive IIP growth, then November has been slightly disappointing. After recording positive IIP growth of +4.19% in Oct-20, the IIP fell to -1.94% in Nov-20. Unlike inflation, IIP growth is reported with a 1-month lag. The core sector numbers and the Composite PMI were giving signals of loss of momentum in November and that is evident in the IIP numbers for Nov-20.

There were some revisions to prior month IIP numbers. IIP growth for Oct-20 was upgraded to 4.19% while for Aug-20 the IIP was downsized to -8.64%.

Chart Source: MOSPI

Bouncing back versus gathering momentum

The latest RBI Financial stability report has stated that overall capacity utilization in Indian manufacturing sector had moved up. This is evident in the IIP moving from contraction of -57.31% in April 2020 to almost pre-COVID levels by September. But the real challenge begins now. The government combined $400 billion monetary and fiscal stimulus to create a glut of liquidity. Easy money played its part in getting production back.

The bigger challenge is reviving consumer and investment demand. RBI has warned in its FSR that the NPA trajectory could nearly double in next one year. That could make banks a lot more conservative; impacting credit flow to productive sectors in the economy.

Breaking up the IIP components for Nov-20

Among the 3 components of IIP; mining and manufacturing have shown negative growth. In fact, Mining slipped deep into the negative while manufacturing slipped from positive to negative in Nov-20. In Oct-20, manufacturing had moved into positive territory but that appears to have been negated in Nov-20. Even electricity generation; the star performer of Oct-20, saw growth tapering from 11.25% to 3.5% in Nov-20.
Apparently, mining and manufacturing are finding it tough to keep up the momentum of revival from lower levels of April. Typically, the overall IIP tends to gravitate towards the manufacturing growth as it has a 77.6% weightage in the overall IIP basket.

Weight Segment Base Index IIP Growth (Nov) IIP Growth (Oct)
0.1437 Mining 112.70 104.50 -7.28% -1.31%
0.7764 Manufacturing 130.60 128.40 -1.68% +4.12%
0.0799 Electricity 139.90 144.80 +3.50% +11.25%
1.0000 Overall IIP 126.30 128.80 -1.94% +4.19%
Data Source: MOSPI

For the first 8 months of fiscal 2021 (Apr-Nov) cumulative IIP is down -15.5% on a yoy basis. If the government has to meet advance GDP estimates of -7.7% for FY21, a sharp bounce in the IIP in next 4 months combined with an overall improvement in services sector is inevitable. Even with the best efforts, agriculture will have limited impact due to its low weight in GDP.

Manufacturing in Nov-20; who gained and who lost?

Here is a quick take on manufacturing; having 77.64% weightage in the IIP basket. Positive growth was visible in food products (+8.0%),

Rubber Products (+6.8%), fabricated metal products (+2.1%), basic metals (+1.2) and motor vehicles (+0.9%).

A number of products saw deep contraction in output. These included, Furniture (-26.1%), paper products (-22.7%), apparel (-18.8%), Recorded Media (-19.8%), beverages (-16.1%), electronic products (-15.4%), tobacco products (-13.8%) and leather products (-9.4%).

If you consider the Apr-Nov period, the overall contraction in IIP is -15.5% with all products showing negative growth. Only the pharmaceuticals segment has shown flat growth in the first 8 months of fiscal 2021.

User industry analysis for Nov-20

The IIP data can also evaluate growth from the perspective of user industries. This gives an idea of whether the improvement in momentum is sustainable.

Weight Segment Base Index IIP Growth (Nov) IIP Growth (Oct)
0.34 Primary Goods 124.50 121.30 -2.57% -3.21%
0.08 Capital Goods 91.10 84.60 -7.14% +3.50%
0.17 Intermediate Goods 140.90 136.70 -2.98% +2.05%
0.12 Infrastructure / Construction 134.50 135.50 +0.74% +9.93%
0.13 Consumer Durables 116.70 115.90 -0.69% +18.01%
0.15 Consumer Non-Durables 150.20 149.91 -0.19% +7.14%
Data Source: MOSPI

There seems to have been a major negative shift in the IIP across all the user segments in the month of Nov-20. In Oct-20 only primary goods was negative in terms of user industry growth while the other five were positive. In Nov-20 only infratsructure is marginally in the positive with all the other segments being in the negative. The worrying signal is capital goods user data dipping sharply from positive to negative growth; raising questions about the revival of the capital cycle.

Will negative IIP keep RBI rates at lower levels?

In the last two credit policies of October and December 2020, RBI has underlined that the revival in growth will be its primary focus. For that the RBI was willing to keep rates low for as long as required. The IIP figure, which showed some traction in September and October, has dipped into negative in November. Whether this is a random reversion due to the base effect, will be evident in the next couple of months. However, it does look like the IIP revival could take longer than anticipated and the RBI is likely to keep rates low and liquidity accommodative till then.

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