India’s IIP growth in Nov-21 slipped to the lowest level in 9-months, coming in at 1.4%YoY compared to 4.0% in Oct-21. The outcome was weaker than market expectations which were pegged at around 2.9%.

• On the sectoral side, the slowdown was broad-based. In tandem with the headline, annualized growth in mining and manufacturing both eased to a 9-month low of 5.0% and 0.9% respectively (see table).
• Sequentially, IIP index contracted by a sharp 4.7%MoM led by loss in output in index heavy weight manufacturing along with electricity. The contraction in the IIP index was largely anticipated by our proprietary AMEP (Acuité Macroeconomic Performance) index which fell to 111.0 in Nov-21 from a post-Covid peak of 124.9 led by easing of festive demand.
• With this, IIP index slipped marginally below pre-pandemic level in Nov-21 i.e., compared to 2-year ago levels as of Nov-19.
• While most indicators reverted to higher growth in Dec-21, the dip in Nov-21 can be attributed to the post festive fatigue along with lesser number of working days in the Diwali month.

Key granular details

• Out of 23 manufacturing industries covered by the IIP, 20 posted a sequential contraction in Nov-21 vs. 7 in Oct-21; underscoring the deterioration in the breadth of industrial activity.
• The 4.8% MoM drop in manufacturing sector output, was driven by sub-sectors: 1) Other transport equipment (-23.3%), 2) Computer, Electronic and Optical Products (-17.5%) and 3) Wearing apparel (-17.2%).
• On the use-based side, Consumer durables and Capital goods, both saw a sizeable drop-in sequential activity by 17.3% MoM and 9.7% MoM respectively in Nov-21. As such, annualized growth for both the categories remained in contraction for the third and second month in a row respectively.
• On an item level basis, we note that the weakness in consumer durables was predominantly led by two-wheelers and electric heaters. On the other hand, sharp decline in production of agriculture related machinery such as tractors, harvesters and threshers weighed on capital goods output in Nov-21. This reflects the recent slowdown witnessed in rural demand amidst delayed Kharif harvest and unseasonal showers.

Outlook

Going by the recovery seen in most lead indicators in the month of Dec-21, it can be expected that IIP growth too may partly bounce back next month. Having said so, growth prospects for Q4 FY22 remain clouded amidst the fast spread of Omicron cases in the country that have led to the reimposition of restrictions at the state-level. So far, the bulk of impact has been on consumer mobility and contact service sectors in particular, with high frequency indicators such as e-way bills, railway freight and electricity generation having held up well. While it is still early to make a strong conclusion, the indications are that the latest wave will entail lower/minimal restrictions on industrial and export related activities.

In addition, the international evidence which points to Omicron variant being less virulent and resulting in lower hospitalization rate, offers hope. Further, India has made reasonable progress on vaccination with 69% of the adult population being fully vaccinated, which has now been opened up for 15-18 years old as well. In addition, monetary and fiscal policies remain broadly supportive.

On the downside, adverse spillover from domestic and global lockdowns prolonging supply side disruptions, elevated commodity prices and potential financial market volatility on account of monetary policy normalization by key global central banks could weigh on industrial recovery.

Annexure-1

Chart 1: Breadth of recovery for manufacturing sub-sectors deteriorates in Nov-21

Table 1: IIP growth at a glance