After six consecutive months of sharp negative growth in industrial production, IIP growth for September was barely in the positive territory with a growth of 0.2% compared with (-) 8% in the previous month and (-)4.6% contraction in the corresponding period last year. CARE Ratings’ had estimated IIP to fall by (-)2.1% during September.

The positive growth in IIP reflects resumption of business activities in the industrial sector with both mining and electricity recording positive growth while manufacturing registered a contraction, albeit with a sharp improvement from the previous month. Based upon the use-based classification, consumer durables and non-durables have the biggest positives with even infrastructure goods registering marginal positive growth. The uptick in the overall IIP index has been partially on account of favorable base effect but the movement in IIP growth in very much in line with the core-sector growth seen in September. IIP for August 2020 has been revised upwards to (-)7.4% compared with the earlier estimate
of (-)8%.

By Economic Activity

• Mining activity grew to a 7-months high of 1.4% in September 2020 compared with (-)8.6% growth in the corresponding period last year. Low base effect coupled with resumption of industrial activity and increase in power demand has led to the growth during the month.

  • Manufacturing which has the highest weightage (77.6%) in the IIP continues has fallen for the seventh consecutive month and recorded negative growth of (-)0.6% in September compared with (-)4.3% in September 2019 and (-)7.8% in August 2020. There has been a sharp improvement in the contraction from (-)66% seen in the first month of lockdown (April 2020). This can be directly linked to the easing of restrictions on the operation of manufacturing units.

o 10 out the 23 sub-industries in the manufacturing segment have recorded a positive growth during the month of September 2020. Electrical equipment (10%), rubber and plastic products (9.1%), other transport equipment (7.7%), pharmaceuticals (7%) are sectors which have seen the highest growth in September.

o Sectors like printing and media (-20.1%), wood (-15.4%), beverages (-15.3%), wearing apparel (-14.1%), textiles (-11.7%) continue to record sharp negative growth in September 2020.

o Basic metals which have the highest weightage within the manufacturing sector recorded positive growth of 3.7% in September 2020. Chemicals which have a weightage of 7.8% recorded a growth of 5.1%.

• Electricity output grew by 4.9% in September 2020, its highest pace in the last 8 months compared with negative growth of (-)2.6% in September 2019. Favorable base effect, higher industrial activity and resumption of commercial offices during the month has driven growth in the sector.

By Use-Based Classification

• Production of primary goods (contracted by (-)1.5% in September 2020, 7th consecutive month of negative growth.

• Al though growth in industrial production of capital goods (-3.3%) is negative for 21 consecutive months, the sharp improvement seen in this segment from the previous month is reflective of investment activity picking up in the economy. A low base effect has also facilitated the improvement in September to some extent. However, the sustained period of
negative growth continues to reflect fall in investment.

• The growth in consumer durables (2.8%) and consumer non-durables (4.1%) is the biggest positive in the IIP classifications for September. This reflects improvement in consumer demand in the economy and reflects additional production by companies ahead of the festive season.

• Intermediate goods recorded a fall of (-)1.4% in September 2020 compared with a growth of 6.8% in the corresponding period last year. Infrastructure goods have barely moved in the positive territory with a growth of 0.7% in September after 6 consecutive months of negative growth.

In the first half of FY21, each of the sub-components, both on the economy-based classification and used-based classification have recorded sharp deceleration in industrial production, reflective of the impact of the nation-wide lockdown on industrial production. The sharp fall in industrial production of capital goods reflects the slowdown in investment activities while decline in consumer durables highlights the weak consumer sentiments in the economy.

CARE Ratings’ View:

With the unlocking of the Indian economy after further easing of lockdown restrictions, faster resumption of business activities and return of the labourers for working in factories will result in further improvement in industrial production going ahead. At the same time, the pace and extent of the recovery in the same would depend on consumer and investment demand, which in turn would be subject to the containment of the pandemic domestically as well as globally. The positive push seen in September will gain momentum in October too where some of the retails sales numbers have been positive. However sustenance of the same post November will be the trend to watch. A low base effect in the next couple of months will have a positive bearing on the overall growth.

Overall, IIP growth can be expected to move to the no-growth stage this year in case the positive momentum is maintained. Otherwise growth can slip to the negative territory. Hence for revival to positive number for the full year there has to be strong growth in second half which has to be driven by consumption as investment is not expected to recover this year.