IIP back to positive, but does it herald a turnaround in the economy?

By Nishant Kumar

Items which contributed positively to headline IIP growth included electric heaters, steel pipes and tubes, MS slabs, etc.

India's industrial output grew 1.8 percent in November 2019 against a contraction of 3.8 percent in October 2019, as per data on the Index of Industrial Production (IIP) released by the government on January 10.

Industrial output, or factory output, is the closest approximation for measuring the economic activity of the country's business landscape.

Positive IIP numbers have certainly given some relief at a time when the economy is struggling. Experts point out that the IIP numbers have come in positive for the first time in the past four months as production activity in cement and fertilisers picked up.

"It is a good sign for the economy as IIP turns positive after three months of contraction. From the consumption point of view, it is welcoming that consumer non-durables have turned positive. However, consumer durables are still in the negative territory, contracting for the past six months," said Deepthi Mathew, Economist, Geojit Financial Services.

Items which contributed positively to headline IIP growth included electric heaters, steel pipes and tubes, MS slabs, etc. On the other hand, items that detracted from headline growth included stainless steel and alloyed bars and rods, sugar, electricity and auto components and accessories.

Little to cheer 

Even though contraction in industrial production was arrested in November with a print sharply above expectations, experts point out that it was aided by a very favourable base and there is no significant point to cheer.

"Due to a major slowdown in the economy, India’s IIP has been contracting since Aug 2019, however, a favorable base effect and improvement in PMI numbers has led to an expansion,” said Rahul Gupta, Head of Research - Currency at Emkay Global Financial Services.

Karan Mehrishi, Lead Economist at Acuité Ratings & Research said that the minor recovery in the IIP is a function of a favourable base effect that will continue to benefit until the end of the financial year.

He added that manufacturing, which was contracting continuously for the previous three months, has received a fillip from the contraction in November 2018 which is the base year. "Segments without such benefit are maintaining their negative outlook, baring consumer non-durables (use-based),” Mehrishi highlighted.

ICICI Bank, in a report, has highlighted the fact that while the print for industrial production is a considerable positive, most of the segments were aided by a substantially favourable base effect and factors such urban consumption demand, increased need for capital goods, impetus in infrastructure creation, etc. can be decisively gauged only with a few more prints.

The government has pegged industrial growth at 2.5 percent year-on-year (YoY) for FY20 which, analysts and brokerages find, realistic amid stress in manufacturing, weather-related issues in mining and poor offtake in electricity.

On a sectoral basis, manufacturing output significantly improved, but this pace needs to be maintained in order to confirm a reversal of domestic demand malaise. As many as 13 out of 23 industry groups showed positive growth including wood and wood products and basic metals. However, the manufacture of motor vehicles continued to be in the red.

On the use-based classification, capital goods continued to see contraction for the eleventh successive month, but the pace of contraction was much slower.

Infrastructure and construction goods registered the fourth consecutive month of contraction in November, as stressed government funds would have led to some slowdown in the thrust towards infrastructure creation, while private off-take for real estate is not yet on a firm footing, ICICI Bank pointed out in its report.

Some urban consumption revival was seen in this print, with the output of consumer durables showing the smallest contraction in six months. However, this too seems to have been aided by a favourable base and residual demand after the festive season.

"This was just after the festive season and residual demand from the same could have been playing a role, along with a hugely favourable base effect," ICICI Bank said.

The road ahead

The government recently released its advance estimates for gross domestic product (GDP) growth in FY2020 in which it pegged the economic growth rate for 2019-20 at 5 percent, slower than the 2018-19 expansion rate of 6.8 percent.

At 5 percent, the growth would be roughly at an 11-year low. India's GDP — the total value of goods and services produced in the country — slumped to over a 6-year low of 5 percent in the April -June quarter and 4.5 percent in the July - September quarter of 2019.

"Industry growth is expected to take a sharp hit, decelerating to 2.5 percent YoY from 6.9 percent YoY in FY2019. Much of this is attributed to the anaemic performance of manufacturing. The construction sector is also expected to see a major loss of traction this year," said ICICI Bank in a report.

Sector such as mining is also expected to remain subdued for the time being.

"Mining growth is expected to continue at the same pace as in FY19, with extensive rains hampering output of coal, crude oil and natural gas. All three components have shown an overall contraction in output over April-November 2019. The electricity head is also expected to moderate this fiscal, amid both demand and supply downturns, as the power sector continues to grapple with issues including pricing and leverage of power distribution companies," said ICICI Bank.

Moreover, steel prices trended lower for most of 2019 because of the trade war between the US and China and this added to the pressure of low off-take in the domestic market, the bank said.

Govt's infra push can boost growth

All this can change only if the government keeps its focus on spending on infrastructure. On December 31, Finance Minister Nirmala Sitharaman announced Rs 102 lakh crore worth of investment in infrastructure projects over the next five years.

Rating agency ICRA said this can be a trigger for boosting growth.

"Creation of the national infrastructure pipeline in a short span of time is a positive step. The distribution of the infrastructure investment is in line with our expectations with a major allocation going towards transportation, energy and water segments. The front-loading of Capex is also positive for the construction sector," a PTI report quoted ICRA's Senior Vice-President and Group-Head, Corporate Ratings Shubham Jain saying so.

However, some experts call it a slightly ambitious target and the execution of the said road map will be dependent on the fiscal position of the government which at the moment looks slightly fragile.

“Highly ambitious target - about three times the past decade's infrastructure investment. Headwinds like lower than expected government revenues and tight fiscal deficit target, weak bank credit to the infra sector, limited private sector equity bandwidth and stretched Balance sheet of infra companies, will make it difficult for the government to implement this programme on the ground,” Parikshit Kandpal of HDFC Securities told Moneycontrol.

“This requires strong support from multilateral funding agencies and equity investment at the under-construction stage by sovereign wealth funds (which looks difficult as SWFs prefer completed projects),” he said.

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