IIP: High industrial output figures may not reflect real growth due to low-base effect from 2020 lockdown

While March IIP figures, and those over the coming months, could be encouraging only due to low-base effect, CPI inflation is not expected to stay in sub-5 per cent territory either, analysts say

May 13, 2021 / 08:48 PM IST

After more than a year of low growth, contraction and slight increases, India's industrial output has shot up in March by rising a stellar 22.4 percent. However, the assuring figures remain just on paper. Now, economists warn that while growth figures may seem massive going forward, they will not be an accurate depiction of the country's industrial state given the extreme low base effect.

Measured by the Index of Industrial Production (IIP), industrial output had suddenly risen in March, after contracting by 3.4 and 0.87 percent in the previous two months of February and January. The IIP is calculated on a year-on-year basis, and the latest percentage rise in industrial output for March, 2021 is based on how output has moved relative to March, 2020. Since that had been the exact month when the nationwide lockdown began and industries shuttered down, the output in March, last year was historically low.

Economists say the latest double digit growth figures mean little given the are being calculated on that low production base of March 2020, which had witnessed nearly 1/3rd less working days due to country wide lockdown.

"Given the low base of the lockdown, we believe it's more meaningful to compare the industrial performance in March 2021 with March 2019, which reveals a mild albeit sobering contraction of 0.5 percent," Aditi Nayar, Chief Economist at ICRA, said.

She added that going forward, while the IIP is set to consistently register significantly high growth numbers, but real growth may be much more humble. ICRA expects the IIP to expand by a transient but relatively meaningless 150 percent in April 2021.


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In March, even manufacturing and electricity output growth had shot up by 25.8 percent (highest in the current series with 2011-12 as base year) and 22.5 percent (highest since June 2014) respectively.

"Now with the second wave of COVID pandemic and associated local/partial lockdowns/curfew, it is unlikely that factory output will get any better in the near term. It is quite likely that there would be an adverse impact on the factory output over the next few months, yet the factory output on year-on-year terms would look good in 1QFY22 mainly due to the base effect," Sunil Kumar Sinha, Principal Economist at India Ratings said.

To support his point, Sinha suggests that data should be approached in level terms. In level terms the factory output in March 2021 was 106.9 percent of the pre-COVID period (February 2020). The manufacturing, electricity and mining output came in at 104.6 percent, 117.1 percent and 112.7 percent of the pre-COVID period, he said.

On the other hand, crucial categories such as capital goods, infrastructure goods and consumer durables showed output in March 2021 was 105.7 percent, 106.4 percent and 109.9 percent of output in pre-Covid level.

However, even this may not be enough to establish whether the economy is operating at optimum capacity. In late and early 2020, India's manufacturing and industrial growth had already slowed down considerably due to global and national factors.

Sinha says therefore, a similar comparison pf the latest figures with March 2019, two years is required. "That shows the output level of primary, capital, intermediate, infrastructure, durable and non-durable goods in March 2021 was only 86.8 percent, 99.3 percent and 97.9. This clearly shows that industrial output has a lot of catching up to do to even to attain the level of output reached in the past.

CPI may settle around 5 per cent

On May 12, Consumer Price Index-based inflation for April came in at 4.29 per cent, the lowest in three months, primarily on back of a sharp decline in food inflation, and well within the comfort range of the Monetary Policy Committee.

Among the sub-groups, the most severe fall in inflation rate was in vegetables, which dropped nearly 15 per cent. Analysts say the fall in prices is likely due to lower demand arising out of regional lockdowns in various parts of the country, a situation which won’t last long.

However, inflation is unlikely to cross the MPC’s target of 4 (+/-2) per cent in 2021-22.

“We continue to expect CPI inflation to moderate towards 5 in FY22 from 6.2 per cent in FY21 as expectation of normal monsoon, bumper harvest, likelihood of downward adjustment in fuel taxes, and favorable base effect would offset the upside emanating from higher global commodity prices,” said Shubhada Rao, founder of QuantEco Research.

“Nevertheless, we would keep an eye on both COVID redux and COVID riddance as potential factors influencing the inflation trajectory in unanticipated manner,” Rao added.

ICRA’s Nayar also said that CPI inflation should average around 5 per cent in the first half of the fiscal year.

“Going forward, health and fuel and light inflation is likely to show and increasing trend due to government’s fuel taxation policy and COVID related health expenditure. Cooling off of food price is a welcome relief. Volatile nature of food prices will make retail inflation volatile and is expected to remain in 4-5 per cent range in next six months,” said India Ratings’ Sinha.

Sinha said that MPC’s monetary policy stance is likely to lean towards maintaining status quo while Nayar said that it would be accomodative.
Subhayan Chakraborty
Arup Roychoudhury

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