Amidst continued waning of the favorable base, IIP growth moderated further in Jul-21 to 11.5% YoY compared to 13.6% in Jun-21. The print however came in a tad above market consensus expectations which was pegged at 10.2%.

Looking beyond the headline, sequential momentum remained strong for the second consecutive month, with the index jumping by 7.2%MoM over and above the 5.7% gain recorded in Jun-21. The continued unwinding of lockdown restrictions at the state-level, improvement in personal mobility amidst infection caseload remaining fairly ranged helped quicken the pace of recovery in industrial activity in Jul-21.

• The uptick in sequential momentum, on the sectoral side, was led by the heavyweight, manufacturing along with electricity. Mining activity recorded a sequential contraction for the second consecutive month, in line with negative seasonality seen during monsoon months.
• While easing of lock-down restrictions has aided manufacturing sector in the months of Jun-July’21, the overall output is still tracking lower at -4.1% as compared to the corresponding pre-Covid period of 2019 (see chart 2).
• Out of the total 23 manufacturing industries, only 6 industries namely Pharmaceuticals, Textiles, Basic metals, Chemicals, and Minerals have managed to record a steady recovery as compared to Jun-Jul’19. However, production for most of the other industries is still lower with Wearing apparels, Beverages, Furniture, Tobacco and Transport equipment trailing in deep double-digit contraction.
• On the use-based side of classification, broad-based sequential expansion was recorded with strong growth registered in Capital goods and Consumer Durables for the second consecutive month in Jul-21.
• At the granular item-wise level, capital goods recovery was driven by – Bodies of trucks, lorries & trailers, Printing machinery, Commercial vehicles and Boilers. Out of 67 capital goods tracked under IIP, 45 goods registered a rise in production in Jul-21 vis-à-vis Jun-21.
• Leading gains on Consumer durables side was higher sequential production of – Electric heaters, Telephones & mobiles, TV sets and Gold jewellery. Of the other index heavy weights, growth of Two wheelers and Auto ancillary was modest, while that of Passenger Cars was in low single-digits in comparison. Passenger car production, as per anecdotal estimates, has witnessed some setback in the month of Aug-21 amidst semi-conductor shortages beginning to weigh. This could exert some downward pressure on incoming IIP readings.
• Compared to 2019, IIP index is now almost at par, indicating a near complete recovery vis-à-vis pre-pandemic levels. However, at a granular level, there remains a significant divergence (see chart 1). Most stark being consumer durables, which have been the slowest to recover.

Outlook

Looking beyond Jul-21, sequential recovery in industrial activity is expected to continue aided by the onset of the festive season, even as headline annualized growth begins to moderate from current levels. On a FYTD basis, IIP has clocked a growth of 34.1% compared to a contraction of 29.3% over the same period last year.

Support to incremental recovery is likely to come from:

• Strong V-shaped global growth recovery buoying India’s exports in FY22.
• A stronger revival in rural demand vis-à-vis urban, amidst above normal area sown under Kharif crops as of end Aug-21 and Government’s fiscal policy support.
• Vaccination drive having gained momentum over the last fortnight, with average daily pace of vaccinations rising to nearly 8mn. As of 11th Sep-21, India has vaccinated 40.3% of its population with a single dose and fully vaccinated 12.4% of the population. We expect vaccinations to attain a critical mass by end Dec-21.
• As vaccinations approach critical mass, it will help revive consumer sentiment and demand, especially for consumer durables and services.

The other silver lining in the form of strong support from global economic growth to domestic exports and an accommodative policy backdrop (both monetary and fiscal) should further aid sequential recovery in industrial activity. Having said so, subsequent IIP readings could show some degree of volatility in Q2 FY22, before stabilizing in H2 FY22. We continue to track these developments along with the continuing high level of infections in select states that highlight the potential risks of another wave. We continue to stick to our FY22 GDP growth forecast of 10.0% albeit with some downside risk.

As such, we continue to retain our FY22 growth forecast at 10.0% with downside risks.

Possible risks to growth do remain from the possibility of a third wave of infections, though the loss of economic momentum is expected to be lower in comparison to the second wave. Recent shortfall in availability of semiconductor chips constraining auto production also remains a developing story on watch.

Annexure-1

Chart 1: Unevenness in recovery seen at granular level, compared to 2019

Chart 2: Manufacturing sector is still tracking lower compared to its pre-Covid period

Table 1: Anatomy of IIP growth