There were some favorable revisions to the prior month IIP numbers. IIP growth for Sep-20 was upgraded from 0.24% to 0.49%. Similarly, the IIP contraction for Jul-20 was downsized from -10.77% to -10.55%. That gives room for hope that Oct-20 IIP may also be upgraded from the current level of 3.63%. The chart captures IIP trend in the last 1 year.
Low rates and stimulus appear to have worked
One quick take-away from the IIP trend is that the combination of low rates and fiscal stimulus appear to have worked. Immediately after the onset of COVID-19, RBI cut rates by 115 basis points. Despite maintaining status quo after that, the accommodative monetary stance ensured that liquidity in the banking system is abundant. That has gone a long way in boosting growth through substantial lower cost of funds.
Many sectors like infrastructure, SMEs and even agriculture would have suffered if the government had not been aggressive with 3 rounds of stimulus. The aggressive fiscal stimulus, even at the cost of higher fiscal deficit, spurred this rapid recovery in IIP.
Breaking up the IIP components for Oct-20
Out of the 3 key components of IIP, the mining sector showed negative growth over the base period. This is a marginal deterioration over Sep-20 when the mining sector had shown positive growth. Clearly, the lag effect of the lockdown is still visible. But the big positive surprise was manufacturing. From negative growth in Sep-20, it turned around to +3.5% growth in Oct-20, largely driven by a build-up in demand and output getting back to old levels. The big spurt came in electricity generation as coal supplies got streamlined. Overall IIP gravitated towards the manufacturing median considering its 77.6% weight in IIP basket.
|Weight||Segment||Base||Index||IIP Growth (Oct)||IIP Growth (Sep)|
It looks like the stimulus has driven the supply side of manufacturing while the festive season and the thrust on online sales boosted demand side for manufacturing sector. However, the cumulative impact of the pandemic still persists. As a result, the IIP for the first seven months of FY21 (Apr-Oct) still shows (-17.5%) contraction.
Manufacturing in Oct-20 had its winners; and its losers too
Let usfocus on manufacturinghaving the highest weightage of 77.64% in IIP basket. Here is a quick take. Positive growth was seen in transport equipment (+26.6%), electrical equipment (+20.3%), Motor Vehicles (+17.7%), rubber products (+15.5%), metal products (+13.4%), pharmaceuticals (+12.9%) and electronic products (+10.9%).
There were products that also saw contraction in output. These included, paper products (-20.2%), coke and refined petroleum (-17.3%), printing & media (-12.6%), apparel & textiles (-11.8%), beverages (-11.3%), furniture (-11.0%) and tobacco products (-6.1%).If you consider the Apr-Oct period cumulative, all the product categories, except pharmaceuticals, showed negative growth on yoy basis.
How does the user industry analysis look like in Oct-20
The IIP data can also evaluategrowth from the perspective of user industries. This gives an idea of whether the improvement in momentum is sustainable.
|Weight||Segment||Base||Index||Growth (Oct-20)||Growth (Sep-20)|
|0.12||Infrastructure / Construction||129.50||140.00||+8.11%||+0.71%|
Barring primary goods, there is good news from all other user groups. The big stars of the month were capital goods, infrastructure, consumer durables and consumer non-durables. It is gratifying that traction is coming from consumer demand which is an indication that demand is driving the economy to a higher plane. That is a clearly an outcome of the festive sales and the aggressive ecommerce push.
What about revival in the capital cycle?
The story of the October IIP appears to be driven by consumer durables and non-durables. The bigger question is of a revival in capital investment cycle. While there had been some positive traction in capital goods and infrastructure, a revival in the capital cycle may take some more time. For that to happen, demand will have to grow substantially and capacity utilization must move closer to 90%. That should, hopefully, be the next part of the IIP story!