India’s IIP growth eased to 29.3%YoY in May-21 from a lofty 134.6% in Apr-21, broadly in line with market expectations. The substantial moderation in the numerical print was a consequence of a waning favourable base from last year’s stringent nationwide lockdown in Apr-20.

The double-digit acceleration actually conceals a material contraction in sequential momentum of 8.0%MoM in May-21, reflecting the impact of state level lockdowns that turned pervasive in the month. Barring the pandemic year of 2020, this is the first sequential contraction seen in the month of May in the 2011-12 based IIP series. The weak momentum was in line other high frequency data, such as that of core sector, fuel consumption, tractor and auto production among others. Recall, the month had also seen temporary production closures at several automobile plants, amidst safety concerns and pile up of inventories as well as dealership shutdowns. Further, the diversion of industrial oxygen for medical purposes may have also weighed on select sectoral output (such as in consumer durables, steel 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.
• On a sequential basis, we note that 21 out of 24 manufacturing sub-industries registered a contraction in May-21 over Apr-21, depicting a broad-based decline in industrial activity. Interestingly 3 industries that bucked the trend, are: 1) Pharma and medicinal products (+5.3%MoM), 2) Furniture manufacturing (+1.9%MoM) and 3) Printing and Reproduction of Recorded Media (+0.3%).
• On the use-based side, the slowdown in sequential momentum showed significant divergence. The contraction was least for Primary Goods (-2.9%MoM) followed by Consumer non-durables (-3.7%MoM), reflecting the continuation of core industrial and construction activity during this phase of lockdown, along with steady offtake for small ticket essentials items. At the other end of the spectrum, Consumer durables led the contraction (-27.7%MoM) followed by Capital goods (-18.0%MoM) as discretionary consumption of households (as seen in lower production of index heavy-weights like studded gold jewellery, passenger cars and 2-wheelers) and capacity expansion plans of businesses bore the brunt of the lockdown induced curbs on economic activity.
• At an item-level basis, of the 407 items, 284 items recorded a contraction in output in May-21 over Apr-21 underscoring the depth of the sequential weakness (albeit better than 323 items in Apr-21). The top 10 best and worst performing items in terms of monthly output in May-21 over Apr-21 are summarized in Table1.

Outlook

In our last IIP report, we had highlighted the possibility of a further sequential slowdown in May-21 coinciding with the peak of the healthcare crisis brought about by the second Covid wave. While this pulled down the annualised growth figures for May-21 IIP, the push from a favourable statistical base ensured that it still remained elevated in double-digits. This is likely to continue into Jun-21 as well, and hence highlights the need to interpret Q1 FY22 year-on-year data carefully and also look at the sequential data simultaneously.

Growth momentum has seen a decisive turnaround in Jun-21, led by pick up in mobility and economic activity as validated by several high frequency indicators. However, uncertainty with respect to slowdown in pace of vaccinations and a "break” in rainfall activity have risen lately.

• While India has inoculated close to 23% of its population with the first dose and nearly 5.5% with both the doses (as of July 13, 2021), the pace of incremental vaccination has dipped in the current month. After soaring to a record of 6.2 mn doses per day in the fourth week of Jun-21, the pace has dropped to 3.8 mn in first half of Jul-21 presumably die to vaccine shortages. Further, India continues to lag some of the developed countries (US, Eurozone, UK, etc.) in vaccination progress significantly as a percentage of the population. Having said so, we remain hopeful that an enhancement of domestic vaccine manufacturing capacity along with increased supply through imports would help speed up the vaccination programme within the next two months.
• Fortunately, after remaining on a "break” for three full weeks, the monsoon rainfall is showing nascent signs of a pickup from second week of July with IMD also confirming that monsoon has covered almost the entire country. This revival will support Kharif sowing and agriculture output for the season.

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.

Annexure-1

Table 1: Anatomy of IIP growth

Table 2: ItemWise sequential performance in May-21 over Apr-21

Chart 1: Nearly 23% of India’s population has been inoculated with single-dose