India’s factory output, as measured by the Index of Industrial Production (IIP) contracted by 10.4% on an annual basis in July, according to data released by the ministry of statistics and programme implementation. This is the fifth consecutive month of contraction in IIP. While the contraction is in keeping with a Reuters forecast, it is better than the projected figure (11.5%).
On the brighter side, the data does show a sequential recovery in industrial activity over the previous months. Experts believe a sequential recovery will continue in the months of August and September, but that the lack of fiscal stimulus and dissipation of pent-up demand could generate headwinds to this process.
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Industrial activity in the month of July this year was lower than its last year levels in all categories. IIP is classified into two kinds of categories. Economic activity-based categories include mining and quarrying, manufacturing, and electricity. Usage-based categories include primary goods, intermediate goods, capital goods, infrastructure goods and consumer goods.
The last category has a sub-classification of consumer durables and non-durables. A look at the usage-based categories suggests that both consumption and investment, the two crucial drivers of growth, continue to present a grim picture. While all sub-sectors continue to show a sequential improvement—this month’s numbers are better than previous months—the contraction in capital goods and consumer durables is still more than 20% on an annual basis.
India’s industrial output suffered a contraction of 38% on an annual basis in the first quarter (April-June) of the current fiscal year. The overall GDP contracted by 23.9%.
The government has said that the first quarter’s performance was because of the exogenous shock of the lockdown and the economy is in the process of staging a V-shaped recovery. A V-shape implies that economic activity will quickly come back to its normal levels after suffering a sharp fall.
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High frequency indicators which are available for the post-July period, such as the Purchasing Managers’ Index (PMI) for August and Nomura India Business Resumption Index (NIBRI) until last week, do support claims of a continuing sequential recovery. PMI manufacturing breached the threshold of 50 —a PMI value greater than 50 signifies expansion in economic activity—in August for the first time since April. NIBRI climbed to 77.4 in the week ending September 6, the highest since the lockdown was imposed on March 25. But other indicators such as consumption of petroleum products paint a different picture. According to data released by the petroleum ministry, consumption of petroleum products in the month of August was the lowest since April. The fall was driven by diesel consumption, suggesting a fall in goods transport.
The July IIP numbers suggest that the ongoing sequential recovery might be losing momentum as the curve is straying from a V-shaped pattern.
Experts attribute this to continuing local lockdowns. “The data also shows that the sharp recovery witnessed in the month of May and June is now becoming somewhat flattish. Part of the reason is local/partial/ weekend lockdown imposed in many parts of the country, often without much advance intimation”, said a note by Sunil Kumar Sinha, principal economist at India ratings and research. The recovery could be further jeopardised as number of cases continue to rise. A research note by Nomura warned that the pick-up in resumption of economic activity was being driven by a “lockdown fatigue”.
Madan Sabnavis, chief economist at CARE Ratings, expects the to improve further in August and come close to zero in the month of September. “The critical sectors to be tracked would be auto in particular in the coming months which have shown some signs of a turnaround—based on pent up demand to an extent”, he added.
Passenger vehicle sales improved by 14.1% on an annual basis in August, according to the Society for Automobile Manufacturers (Siam).