India’s industrial production contracted for second month in a row with Feb-21print of -3.6% YoY, weaker compared to Jan-21 growth print of -0.9% YoY (revised up from -1.6% earlier). To be sure, market expectations were geared towards a negative print (-3.0% as per consensus) on the back of weak core sector data and other subdued high frequency indicators – however, the magnitude of contraction turned out to be higher – for second month in a row.

On sequential basis, the IIP contracted by 5.0% MoM in Feb-21 against an average (seen in the current data series with 2011-12 as base) contraction of 3.7% seen in the month of Feb as against Jan. While lesser number of working days in Feb-21 in comparison to Feb-20 can partly explain the weakness, the magnitude of decline certainly points towards a loss in overall momentum.

The Internals: Dismal on all counts

• On the sectoral side, while mining growth remained in contraction for the fifth consecutive month, manufacturing sector posted its second consecutive contraction, thereby pulling down the headline growth (YoY). Meanwhile, electricity sector managed to scrape through a mild expansion that somewhat limited the downside in headline print.
• On the use-based side, barring consumer durables (which was supported by automobile production), all other sub sectors posted annualized contraction in output ranging between 3.8% to 5.6% YoY. It is a matter of concern that three sectors (Primary, Intermediate, and Infrastructure & Construction) with a cumulative weight of 63.6% in the IIP basket are currently at their weakest level in H2 FY21 – this outturn is despite continuation of highly accommodative global and domestic fiscal and monetary policies along with gradual taper down of lockdown restrictions in the previous 9-months (which are set to go up again).
• At a granular level, of the 25 industries covered by the IIP, only 6 grew on an annualized basis in Feb-21 underscoring the broad-based nature of the weakness (namely Electricity, Rubber & Plastics, Electrical Equipment, Motor Vehicles and Trailers, and Other Transport Equipment).

Outlook

With two consecutive months of contraction in industrial activity, the optimism surrounding a strong V-shaped recovery is somewhat getting tempered, especially if one juxtaposes the recent developments with the re-imposition of lockdown measures in select states suffering from a strong second wave of COVID infection. This could weigh on industrial activity in the coming months, although we believe the impact would be lower compared to the earlier phase lockdown in Mar-May 2020.

Nevertheless, there is a silver lining because of which the expectation of a V-shaped recovery (supported by a strong statistical base effect) remains intact:

• Global growth expectations have got marked up in recent months led by strong doubling down of fiscal policy support in the US and continuation of extremely accommodative monetary policies by major central banks. The IMF recently upgraded its forecast for World GDP growth in 2021 and 2022 to 6.0% and 4.4% from 5.5% and 4.2% (provided earlier in Jan-21) respectively.
• The ongoing vaccination drive in India is progressing well as of now with the government being able to inoculate 6.9% of the population with at least one dose of COVID vaccine. At the current rate, India seems well placed to cover around 50% of its population before the end of 2021. This critical mass of vaccinated population would not just boost consumer confidence and enhance mobility, but it should also help in normalizing significant part of economic activity from COVID related disruptions by another 2 quarters.
• Last but not the least is the supportive domestic policy environment characterized by countercyclical fiscal impulses reinforced by the FY22 Union Budget amidst an accommodative monetary and liquidity backdrop that RBI remains committed to.

Having said so, we would closely monitor the evolution of lockdown in select states and its impact on near term economic activity to gauge the extent of downside risk (if any) to our FY22 GDP growth expectation of 11.0%.

Annexure-1

Table 1: Break down of IIP growth

Chart 1: After showing recovery vis-s-vis pre COVID levels in Q3 FY21, IIP sub industries have seen a contraction in output thereafter

Note: Size of the bubble denotes the respective weight in IIP