May IIP rises 29.3% YoY due to low base effect

Representational Image

A low base effect has led to industrial production in India expanding by nearly 30 percent year-on-year in May, against a massive 134 percent rise in April and a 22.4 percent rise in March. When compared with May 2019, however, the industrial output showed a contraction of 13.4 percent.

Measured by the Index of Industrial Production (IIP), data for which was released by the Centre on July 12, industrial output had been contracting till February.

"The growth rates over corresponding period of previous year are to be interpreted considering the unusual circumstances on account of COVID 19 pandemic since March 2020," the government said.

The rationale is that indices for May 2021 are not strictly comparable with May 2020, when the nationwide lockdown was in full force and a majority of factories were not operating. Consequently, there were many units which reported ‘Nil’ production, affecting comparison of the indices for the months of May 2020 and May 2021.

In May, the manufacturing sector saw output increase by 34.5 percent after jumping by nearly 200 percent in April. Growth had been 25.8 percent in March. Compared to May, 2019, manufacturing output shrank by 16.4 percent.
"Encouragingly, the month-on-month dip of 9.5 percent in manufacturing in May 2021 was appreciably narrower than the fall in the GST e-way bills, suggesting that production of goods was less affected than their movement. By this logic, the month-on-month rise in manufacturing output in June 2021, may well end up trailing the sharp increase in the GST e-way bills over the same period," Adit Nayar, Chief Economist, ICRA, said.

 Manufacturing had been in freefall for most of 2020 given the series of total lockdowns implemented at the national and regional levels. But inherent stress in the sector had become visible even before the pandemic hit.

In May, 22 of the 23 sub-sectors within manufacturing posted a year-on-year growth, up from all 23 in March. Interestingly, the manufacturing of pharmaceuticals and medicinal chemicals saw a contraction in May.

Moneycontrol had earlier reported that while Q1FY22 is expected to see a large manufacturing growth, low base effect or otherwise, experts have warned it will not paint a realistic picture of the sector.

Again due to a low base effect, the crucial capital goods segment, which denotes investment in industry, rose by 85 percent in May. In April, this was a massive 1077 percent in April, up from 41.9 percent in March. When compared with May, 2019, capital goods production in the latest month was 36.8 percent lower, hinting that the economy is far from recovering to pre-pandemic levels.

Before this period began, it had slid by 4 percent in February and 9.6 percent in January, after growing by 1.5 percent in December.

Consumer durables and capital goods stood out as the worst affected sectors in May 2021, trailing the pre-Covid levels by 41.2 percent and 36.9 percent respectively according to ICRA.
"With the fresh cases having moderated substantially and a phased unlocking underway, the sequential momentum has improved over a variety of high frequency indicators in June 2021 such as electricity generation (+2.9 percent M-o-M growth), non-oil exports (+5.8 percent), petrol consumption (+18.5 percent), diesel consumption (+29.4 percent), GST e-way bills (+36.9 percent), and vehicle registrations (+127 percent)," Nayar added.

As the high base slowly reduces, ICRA expects a further step down in the pace of IIP growth to 15-20 percent in June 2021.