Apart from the provisional estimates for IIP for the month of September, MOSPI has also provided revised estimates of IIP for the previous months. While the IIP contraction for the month of Aug-20 improved from (-8.00%) to (-7.37%), the months of June and July saw the actual estimates lower than the provisional estimates. That goes to indicate that the pressure of growth downgrades could still be real if rising COVID cases forces another lockdown.
Getting back to pre-COVID levels
The indications of the economy getting back to pre-COVID levels were already there from a set of high frequency indicators like the PMI Manufacturing and PMI Services. The core sector growth, which accounts for 40.27% of IIP basket, also gave a similar indication. In the month of Sep-20, the extent of pre-COVID recovery improved from 93% to 100%. This is also broadly indicated by the top line of manufacturing companies in the Sep-20 quarter. Since Sep-19, we have had 8 out of 13 months negative IIP months. IIP growth for H1-FY21 has improved over August, but at (-21.1%), it will remain a big drag on full-year growth.
This is how the key components of IIP behaved in Sep-20
The 3 principal components of IIP; Mining, Manufacturing and Electricity have shown a distinct improvement in Sep-20 over Aug-20. Manufacturing remains marginally in the negative but that is still a very sharp improvement over August.
|Weight||Segment||Base||Index||IIP Growth (Sep)||IIP Growth (Aug)|
The progressive impact of economic activity returning to normal levels is visible across the 3 sectors. While mining and electricity generation moved to positive in Sep, manufacturing is marginally in the negative on a yoy basis. Like in previous months, the overall growth has gravitated towards the manufacturing sector as it has a 77.64% weight in IIP. The hope is that manufacturing should drive IIP from here on.
In Aug-20, there were some IIP winners and some losers too
We will obviously focus on the manufactured products as ithas the highest weightage in the IIP. Let us look at products that have shown strong positive traction. Strong growth was visible in electrical equipment (+10%), rubber products (+9.1%), transport equipment (+7.7%), metal products (+6.1%), chemicals (+5.1%), basic metals (+3.7%) and motor vehicles (+2.1%).
The positive growth in electrical products is a pleasant surprise. Chemicals and metals are along expected lines as they have been in demand for some time now. Also motor vehicles demand is an indicator of demand bias. Then there are food products and leather products where the growth was less than 1%, but still positive!
There are products that are contracting in the manufacturing sector. Printing and media (-20.1%), wood products (-15.4%), beverages (-15.3%), apparel & textiles (-14.1%), furniture at (-10.8%, coke & petroleum products at (-10.4%) and paper products at (-7.7%) were some key manufacturing sectors that witnessed contraction.
Interesting trends from user industries in Sep-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 or not.
|Weight||Segment||Base||Index||Growth (Sep-20)||Growth (Aug-20)|
|0.12||Infrastructure / Construction||127.60||128.50||+0.71%||-2.30%|
There is good news from user groups like infrastructure, consumer durables and consumer non-durables. Across the six user categories, improvement on a sequential basis is clearly visible. What is more gratifying is that the traction is coming from consumer demand which is an indication that demand is driving the economy to a higher plane. That is infinitely more sustainable as a model.
Stimulus 3.0 should be the icing on the cake
With a monetary policy that has stayed accommodative, and promises to stay accommodative, the latest stimulus package in the form of Atma Nirbhar 3.0 comes as the icing on the cake. The indications from the IIP numbers are that consumer demand is finally driving growth and the latest stimulus has multiple ideas for stimulating demand.
What would really gratify the policy makers is that the stimulus of $400 billion since Mar-20 has finally brought the IIP back to pre-COVID levels. Now starts the much bigger challenge of searching for growth drivers for the Indian economy.