Industrial Production numbers: Despite contraction, there’s hope of recovery

Led by manufacturing, month-on-month growth improved across the sectors


Despite a contraction of 10.4 per cent, the IIP growth in July was better than expected and recovery remains on course as supply conditions improve in the Indian economy. However, demand continues to remain muted in the economy.  

Ever since the nation-wide lockdown began, there had been an adverse impact on the production activity. The production rate remained in red even in June; yet, led by manufacturing, the month-on-month growth improved across the board. Economists feel that IIP growth during July was ahead of consensus expectations. Index of Industrial Production data or IIP is an index that denotes manufacturing activity across different sectors of an economy. 

“India's July IIP contracted by 10.4 per cent compared to expectations of 11.5 per cent and 16.6 per cent slump observed in June. The IIP numbers suggest that the Indian economy is improving from the lows, but the pace of recovery is gradual. But overall, the industrial activity continues to be disrupted by lockdowns and there are still high levels of Covid-19 infections. So even going ahead, we may see the overall business activity getting impacted and IIP figure to remain in contraction,” observed Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services.

Economists point out that with the economy unlocking further, it is not surprising that the IIP is improving on a sequential basis. The economy is seeing pent up demand that has resulted in almost all the components of the index improving on a month-on-month basis. Interestingly, at 6.7 per cent growth, staples recorded the best performance among all categories. While still in deep red, consumer durables and capital goods showed major improvements. Broadly, 15 of the 23 categories of manufacturing improved performance in July compared to June. 

However, only pharma and tobacco recorded growth and all the other categories shrunk on a year-on-year basis. Capacity utilisation for the industry improved to 60 per cent in July over the previous month's 57.7 per cent. For manufacturing, the capacity utilisation improved from 53.4 per cent in June to 55 per cent in July. 

“It is expected that going forward, we will continue to see improvement in segments like consumer non-durables, including the pharma segment. However, a sustained improvement in other components like consumer durables and capital goods will require consumer and business sentiments to improve. This, in turn, will depend on how much time it takes to control the spread of the infection in the country. Any further meaningful stimulus measures by the government will also be supportive of sentiments and economic growth,” remarked Rajani Sinha, Chief Economist and National Director—Research at Knight Frank India.

Experts from Anand Rathi on the latest IIP numbers observed that despite improvement, industry growth in India is still in the bottom five among the major (G-20) economies. This is at a time when most G-20 countries are experiencing industrial contraction, but despite this, India is doing relatively poorly. There has been supply normalisation and the removal of lockdown restrictions are aiding industrial recovery. The experts further pointed out that this improvement process would continue in the first half of the financial year 2020-21, but the impact of demand destruction would be visible in the second half as well as demand woes continue. 

The experts further said that though there has been an improvement in the industrial performance in each successive month since May due to the removal of lockdown restrictions, the demand in the Indian economy continues to remain weak.

Despite this, there is a ray of hope as the July IIP data, though in the negative territory, showed improvement on a month-on-month basis after contracting over 50 per cent in the month of April. Data for the previous month has been revised as the government is getting a clearer picture of the on-ground activity.

“If you look, components such as manufacturing and electricity consumption, though in the negative, have improved sharply indicating pick up in pace of consumption and economic activity. Consumer non-durable components growing at plus 6 per cent is an encouraging sign. With the government lifting restrictions in the subsequent periods post March-April lockdown, industrial activity is resuming, going forward with further unlock measures and a good monsoon, the situation is expected to improve. A recovery in industrial activity in July indicates a better reading for second quarter GDP growth,” said Nish Bhatt, Founder and CEO, Millwood Kane International, an investment consulting firm. 


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