The IIP report issued by MOSPI starts off with a caveat that the IIP numbers for Apr-20 are an exception and hence cannot be compared with other months. That is understandable. However, what is intriguing is the reluctance of MOSPI to report a 55.5% contraction. Instead, they have just limited themselves to reporting the index numbers for the month of April. Let us first focus on the components of IIP.
How the key components of IIP panned out?
Unlike in other months, the MOSPI has abstained from giving the de-growth figures. Instead, they have just mentioned the index numbers and left the calculations to the user. On an overall basis, there are not too many surprises as shown in the table below.
Mining and electricity with a combined weightage of 22% did not do too badly relative to the overall economy. For example, mining activity compressed by 27.37% while electricity generation contracted by 22.59%. In both these cases, the core production was not affected except for logistical factors taking its toll, including the non-availability of labour. The real hit was on manufacturing and with a weightage of 78%; the overall IIP tends to gravitate towards the direction of manufacturing. For the month of Apr-20, manufacturing activity contracted by 64.26% and that took its toll on the overall IIP.
What specific sub-groups of manufacturing saw deep cuts? Unlike in previous months, the MOSPI has only disclosed the index numbers. Let us look at where the manufacturing in Apr-20 was reassuring. In the case of manufacture of food products, refined petroleum, pharmaceuticals, chemical and botanical products, the contraction was less than 30% on a YOY basis. However, manufacturing of beverages, tobacco products, textiles, apparel, wood products, fabricated metal products, electronic equipment, computers, electrical products, motor vehicles and other transport equipment saw contraction off over 90% in Apr-20.
Viewing IIP from a user industry perspective
Another way to look at the IIP data is through the lens of the user industries. This gives a much better insight into the supply chain issues constraining production.
|Weight||Segment||Base||Index||Use Based IIP Growth|
|0.12||Infrastructure / Construction||135.00||21.70||-83.93%|
As can be seen from the above data, the cuts have been very sharp in some of the user industries. The sharp cut in capital goods shows that any revival in the capitalinvestment cycle may still be some time away. With most retail outlets and malls shut by order, the consumer durables segment has also seen a major contraction. Infrastructure projects and construction activity was at a virtual standstill due to the labour and material related constraints. The situation was slightly better in the primary inputs and in consumer non-durables, where the demand was not overly impacted despite the lockdown. The sharp fall in the capital goods and construction means that the activities with highmultiplier effect are stagnant. That could be a challenge!
What does this IIP number mean for rate action?
Between March and May, the RBI cut repo rates by 110 basis points and the MPC minutes have clearly focused on the need to support growth with low rates. A revival in IIP will be one of the key goals of a low rate policy. In the last few months, the transmission has become a lot more rapid. That comes with downside risk that rates on deposits are also falling but that is par for the course. As lower rates get transmitted, the linkage between a dovish policy and IIP growth should become more obvious.
For the month of May-20, the MOSPI has only disclosed food inflation levels at 9.28% and has not disclosed headline inflation or core inflation due to shortage of data points. That leaves the RBI with only the IIP for driving its rate action. With IIP likely to be under pressure till September, the RBI may be inclined to maintain a dovish stance.