Sep-21 IIP at 3.1% indicates that base effect may be done

n Aug-21, IIP was 3.88% above pre-COVID level, but September has built on that conviction.

Nov 15, 2021 07:11 IST India Infoline News Service

September 2021 marked the seventh consecutive month of positive IIP growth. However, if Aug-21 was the month that saw the base effect waning, then September is when the base actually vanished. That explains why the growth in the IIP tapered to 3.1% in Sep-21. Going ahead, the IIP number will be reflective of genuine growth traction in industrial production. In terms of the IIP range, September has seen a sharp fall compared to the median IIP growth in the previous 3 months, which was closer to 12%.

IIP growth in Mar-21, Apr-21 and May-21 can be classified as outliers due to the extremely weak base effect. If you consider the period from June to August as normalized, the IIP was still in double digits. Compared to that, the IIP is relatively lower in September. However, unlike previous months, the Sep-21 IIP growth is not on a negative base but on a positive base and that makes it special. Let us turn to the pre-COVID period. If you consider IIP over Sep-19, then the IIP in Sep-21 is actually higher by 4.1%, and that is a convincing story. In Aug-21, IIP was 3.88% above pre-COVID level, but September has built on that conviction.

Data Source: MOSPI

Looking at the cumulative IIP picture for FY22

With the Sep-21 IIP announced, we have reliable data for 6 months. For the first half of FY22, the cumulative IIP has grown by 23.5% yoy. But how does the picture look compared to the pre-COVID period. Compared to pre-COVID levels, cumulative IIP for first 6 months is still -2.2% below the corresponding 6 months to Sep-19. That should hopefully correct in the coming months as data progresses.

On the subject of upgrades of IIP of previous months, they have been marginally positive. The final IIP estimate for Jun-21 was upgraded from 13.62% to 13.81%. At the same time, the first revised estimate for Aug-21 has moved higher from 11.86% to 12.03%. These are positive tidings and give hope that Sep-21 IIP could also be upgraded.

How did the components of IIP pan out in FY22?

We have 6 data points in IIP for FY22 i.e. April to September. How did the 3 key IIP components of mining, manufacturing and electricity pan out for this period. Mining growth for 6 months stood at 22.3%, manufacturing growth at 25.3% and electricity growth at 12.8%. The overall IIP growth in the first 6 months of FY22 was 23.45% yoy.

We also look at FY22 (Apr-Sep) data and compare it to the FY20 (Apr-Sep) period. On a 2 year basis, the mining sector was up a healthy 3.71%, manufacturing was down -3.89% and electricity was up 3.78%. Overall IIP for the Apr-Sep period is still lower by -2.19%, but this is the closest we got to pre-COVID levels. A lot will depend on how manufacturing picks up, but there is improved momentum over Aug-21.

Reading between the lines of the pre-COVID comparison

We can break up the 3.06% Aug-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
Sep-20
IIP Index
Sep-21
IIP Growth
Over Sep-20
IIP Growth
Over Sep-19
0.1437 Mining 87.60 95.10 +8.56% +10.12%
0.7764 Manufacturing 126.50 129.90 +2.69% +3.10%
0.0799 Electricity 166.40 167.90 +0.90% +5.84%
1.0000 Overall IIP 124.10 127.90 +3.06% +4.09%
  Data Source: MOSPI

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

In the table, the last column shows that mining and electricity are well above pre-COVID levels while manufacturing is just growing over pre-COVID levels. Due to the 77.64% weight of Manufacturing in IIP basket, overall IIP growth over Sep-19 levels is limited to 4.09%. But India is growing over pre-COVID period for sure. It shows that the recovery is well and truly on track for the Indian economy.

If IIP stabilizes, policy makers will worry less about it

One takeaway is that IIP is finally growing; not only over 2020, but also over 2019. We may have had 2 lost years but the combination of fiscal and monetary measures have worked in boosting the economy. The RBI would be inclined to focus less on IIP growth and more on controlling the forces of inflation. After all, inflation is not just an India-specific problem but is now a global problem.

In the Oct-21 monetary policy, RBI stuck to low rates low and accommodative stance. However, this IIP figure may be interpreted as the first sign of durable growth. If this evidence repeats for a few more months and if Indian inflation follows US inflation, then the RBI may focus more on prices and less on GDP revival. That could be an inflexion point!

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