Annualized IIP growth continued to normalize further in Jun-21, as it came in at 13.6% compared to 28.6% in May-21; broadly in line with market expectations. While tapering of favorable base weighed on headline growth (though still high compared to historical levels); it masked the jumpstart in sequential momentum after a gap of 2 months. To be precise, IIP index registered an expansion of 5.7%MoM in Jun-21 to partially reverse the lockdown driven cumulative contraction of 21% over Apr-May. The gradual easing of state-level restrictions Jun-21 onwards is well reflected in the IIP data and also other lead indicators such as PMI, auto sales, fuel consumption among others.

• On the sectoral side, the sequential slowdown was led by manufacturing sub-sector, that remained in contraction for the second consecutive month, posting a 9.5%MoM contraction on the top of a 12.4% already seen in Apr-21 vs Mar-21.
• Rebound in manufacturing was strong at 7.4%MoM, with 20 of 23 sub-industries posting a positive sequential growth. The front runners included – Transport Equipment (+90.9%MoM), Beverages (+48%MoM) along with Motor vehicles & trailers (+44.7%).
• On the other hand, mining posted a contraction (-2.3%MoM) as excess rainfall in Jun-21 weighed on activity.
• On the use-based side, all sub-sectors with the exception of Primary goods expanded sequentially. Of which, pick up was exceptionally strong for consumer durables (+33.5%MoM) and capital goods (27.1%MoM).
• Leading the bounce-back in consumer durables, were the segments – Computer & peripherals, Passenger cars and Two wheelers predominantly. On the capital goods front, the growth momentum was driven by Commercial vehicles, Boilers, Air filters and Industrial fans.
• At a broader item-level basis, of the 407 items, 285 items recorded an expansion in output in Jun-21 over May-21 underscoring the depth of sequential pickup.
• For the past data, Mar-21 growth was revised up by 10 bps to 24.2% while May-21 was revised lower by 70 bps to 28.6%

Outlook

The highlight of the Jun-21 IIP print undoubtedly was the bounce-back in growth momentum, as the economy opened up post the near pervasive state-level lockdowns in May-21. At the headline level, annualized growth eased but continued to remain elevated amidst a still supportive favorable base from last year’s near complete nationwide lockdown. As such, for Q1 FY22, IIP growth clocked an average growth of 45.0% compared to a contraction of 35.6% in Q1 FY21. Basis preliminary estimate, we forecast Q1 FY22 real GVA growth to possibly come in at around 20%YoY.

After a pickup in Jun-21, growth momentum has continued to tick along well into the months of Jul-Aug-21 as per high frequency indicators. Early indicators point towards economic activity at present to have reverted to pre-second Covid wave peak. While this may mean sequential growth recovery continuing into Q2 FY22, the headline growth is likely to drop into single-digit expansion as the positive base wanes out completely.

From growth perspective, progress on vaccination remains the most critical monitorable. As of 13 Aug-21, India has inoculated 29.8% of its population with a single dose and fully vaccinated 8.5% of its population. However, the pace of vaccination continues to hover around 4-5 mn doses/day; falling short of Government’s own target for the month of Jul-21. The enhancement of vaccine supplies via both domestic ramp-up of production and imports remains somewhat slower than envisaged, as of now. A boost to supplies over the next few months, coupled with targeting of vaccine hesitancy, can ensure critical mass of vaccinations being attained by the end of the year.

A durable support to domestic exports is already visible from the V-shaped global growth recovery. This should fortify in the coming quarters, validated by IMF in its latest World Economic Outlook report (Jul-21) upgrading its forecast for growth in world trade volume to 9.7% and 7.0% in 2021 and 2022 from 8.4% and 6.5% respectively. In addition, an accommodative policy backdrop (both monetary and fiscal) should further aid sequential recovery in industrial activity. As such, we continue to retain our FY22 GDP growth forecast of 10.0% (with some downside risk).

We do acknowledge downside risks emanating from the possibility of another wave of Covid infections and longevity of pent-up demand/re-stocking of inventories ahead of the festive season, besides scarring seen in consumer sentiment, jobs and incomes. However, we do remain hopeful that subsequent economic loss may well be limited by the traction in vaccinations. Looking beyond FY22, the recent Government announcement of deciding to roll back the retrospective taxation law and the swift progress on Production Linked Incentive Scheme, may mean that loss of potential industrial output can be made up for in the medium term.

Annexure-1

Table 1: Anatomy of IIP growth