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Oct-21 IIP up 3.2% as base effect gradually wanes

Going ahead, the IIP number will be reflective of genuine growth traction in industrial production.

December 13, 2021 8:11 IST | India Infoline News Service
The month of October 2021 marked the eighth consecutive month of positive IIP growth for the Indian economy. In October 2021, the base effect had not only vanished, but the growth came on top of positive growth in the previous year. That explains why the growth in IIP has been subdued at 3.2% in Oct-21. Going ahead, the IIP number will be reflective of genuine growth traction in industrial production.

The year 2021 can be broadly divided into 3 phases. IIP growth in Mar-21, Apr-21 and May-21 were the classic outliers due to low base effect. The next period of June to August was the process of normalization as the base effect started to diminish. However, the IIP in Sep-21 and Oct-21 were on a positive growth base, so they are a lot more real. If you consider IIP growth over Oct-19, then IIP in Oct-21 is higher by 7.8%, exhibiting genuine recovery from COVID impact. This pre-COVID growth has been building since Aug-21, which is a good sign.

Data Source: MOSPI

How does the 7-months cumulative picture look for FY22?

With the Oct-21 IIP announced, we have reliable data for 7 months. For the 7-months period of FY22, cumulative IIP has grown by 20% yoy. But how does the picture look compared to the pre-COVID period. Compared to pre-COVID levels, cumulative IIP for first 7 months is down by a marginal -0.76% compared to the corresponding 7 months to Oct-19. Cumulatively, it does look like the IIP figure has finally covered the COVID losses.

Let us talk about the upgrades to previous IIP estimates and they have been marginally positive. The final IIP estimate for Jul-21 was upgraded 9 bps from 11.45% to 11.54%. At the same time, the first revised estimate for Sep-21 has been raised by 20 bps from 3.10% to 3.30%. These are positive tidings and make us optimistic of further upgrades.

Breaking up IIP growth for 7 months of FY22

We have 7 data points in IIP for FY22 i.e. April to October. Let us look at the 3 key IIP components of mining, manufacturing and electricity in this period. Mining growth for 7 months stood at 20.4%, manufacturing growth at 21.2% and electricity growth at 11.4%. The overall IIP growth in the first 7 months of FY22 was 20.0% yoy.

A better way is to look at FY22 (Apr-Oct) data and compare it to the FY20 (Apr-Oct) period. On a 2 year basis, the mining sector was up a healthy 4.51%, manufacturing was down -2.31% and electricity was up 5.16%. Overall IIP for the Apr-Oct period is still lower by -0.76%, but is almost at par with pre-COVID levels. A lot will depend on how manufacturing picks up, since it has the predominant weightage of 77.64% in the IIP basket.

How did the October 2021 IIP traction build up?

We can break up the 3.16% Oct-21 IIP growth into mining, manufacturing and electricity. We also compare with 2-year ago period to get a picture of structural impact.

Weight Segment IIP Index
Oct-20
IIP Index
Oct-21
IIP Growth
Over Oct-20
IIP Growth
Over Oct-19
0.1437 Mining 98.50 109.70 +11.37% +10.29%
0.7764 Manufacturing 132.00 134.70 +2.05% +6.59%
0.0799 Electricity 162.20 167.30 +3.14% +14.65%
1.0000 Overall IIP 129.60 133.70 +3.16% +7.84%
  Data Source: MOSPI

IIP growth reported by MOSPI is a yoy number and, hence, vulnerable to base effect. This is more pronounced in an outlier year like 2020 which was negatively impacted by COVID-19. So, 2021 output looks optically high in comparison. One way to neutralize the base effect is to compare IIP figure with the pre-COVID numbers reported 2-years back.

Both mining and electricity are showing double-digit growth above pre-COVID levels as shown in the last column. However, even manufacturing is picking up traction. The overall IIP growth over Sep-19 levels at 7.84%, is more because IIP gravitates towards manufacturing, with its 77.64% weightage. One key takeaway is that finally there seems to be growth traction, well above the pre-COVID levels.

Monetary policy focus to shift from growth to inflation

The good news on the growth front is that the monthly IIP is now well and truly above the pre-COVID 2019 levels. Of course, the cumulative IIP is still to better pre-COVID levels, but that should happen sooner rather than later. With the Fed turning hawkish and inflation continuing to remain sticky, this means the RBI is now likely to lean more toward inflation control and less towards spurring growth.

In the Dec-21 monetary policy, RBI stuck to low rates and accommodative stance keeping in view the uncertainty created by the Omicron virus and the Evergrande crisis in China. However, it does look like IIP is now on auto-growth mode and that should make the RBI feel better. Feb-22 monetary policy may actually see an actionable shift towards inflation control.

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