Mar-22 IIP stays under 2% as supply chains hit manufacturing

13 May 2022 , 11:07 AM

The latest IIP announcement for March 2022 (IIP is announced with 1-month lag) marked the 13th consecutive month of positive IIP growth for the Indian economy. However, a full 5 months after the base effect had been neutralized, the IIP growth has stayed consistently under 2%. Unlike in February 2022, when the IIP growth remained under 2% despite a negative base, March 2022 has seen growth over base IIP number of 24.14% in March 2021. That is certainly commendable and shows that IIP is now well above pre-COVID levels.

Data Source: MOSPI

The last 13 months of IIP growth can be split into 3 phases. The first phase between March 2021 and August 2021, was an outlier due to a low base. Subsequently, September and October represented normalization as growth gravitated to median levels. Since November 2021, IIP has remained under 2%. This has been the combined impact of Omicron, Fed hawkishness, input inflation, Ukraine war and China shutdowns. In last 5 months, IIP has gravitated towards a median level of 1.36%

Cumulative IIP for FY22 gives a longer term picture

With the March 2022 IIP announced, there is credible data for 12 months of FY22. During FY22 (April-March), cumulative IIP grew 11.3% yoy. Since FY21 was a year of negative growth at -8.4%, we need to look at 2 year cumulative IIP growth to get a clear picture of growth over pre-COVID levels. Cumulative IIP for first 12 months of FY22 was 1.95% higher compared to the corresponding 12 months of FY20 (April to March). This is the first time cumulative IIP for FY22 is decisively higher than FY20. In a sense, we can interpret this as the ghosts of COVID finally being exorcised.

When it comes to IIP, the monthly numbers go through two revisions viz. the first revised estimate after 1 month and the final revised estimate after 3 months. It gives a good idea of how the current month IIP number may eventually pan out. Let us look at changes to previous IIP estimates. The final IIP estimate for December 2021 was upgraded by 29 bps from 0.73% to 1.02%. At the same time, the first revised estimate for February 2022 has been downsized by 26 bps from 1.69% to 1.46%. You can call it “blow hot, blow cold” as it presents a mixed bag. The fact is; high frequency numbers are still facing the overhang of the fearsome foursome viz. Russia Ukraine war, Fed hawkishness, input inflation and China lockdowns.

Dissecting segments of cumulative IIP growth for FY22

We now have the full FY22 IIP data to get a cumulative picture on a yoy basis and on a 2-year pre-COVID basis. Overall cumulative IIP for FY22 has grown by 11.3% yoy and is up a robust 1.95% over the pre-COVID levels of FY20. But a clearer picture will emerge when you break up this figure into the 3 key IIP components viz. mining, manufacturing and electricity. Let us first look at 1-year growth. Mining growth for FY22 stood at 12.2%, manufacturing growth 11.7% and electricity generation growth 7.9% yoy. Overall IIP growth for FY22 over FY21 stood at 11.3%.

However, yoy growth carries with it the base effect mirage. Hence, we supplement our analysis with a clearer pre-COVID picture. Over 2 years (FY22 over FY20); mining sector IIP grew 3.45%, manufacturing  was finally higher by 0.98% while electricity was up 7.36%. Overall IIP for FY22 was higher by a healthy 1.95%; showing the first long-term signal of decisive growth over pre-COVID levels. The pressure comes from tepid growth in manufacturing, due to its 77.64% weightage in the IIP basket.

But, real story often lies in the high frequency data

We can break up the 1.85% March 2022 IIP growth into mining, manufacturing and electricity. Having seen 2-year growth, we also look at high frequency MOM growth.

Weight	Segment	IIP Index Mar-21	IIP Index Mar-22	IIP Growth Over Mar-21	IIP Growth (HF) Over Feb-22
0.1437	Mining	139.00	144.60	+4.03%	+17.37%
0.7764	Manufacturing	143.30	144.60	+0.91%	+10.89%
0.0799	Electricity	180.00	191.00	+6.11%	+18.78%
1.0000	Overall IIP	145.60	148.30	+1.85%	+12.52%

Data Source: MOSPI

In the table above, we have looked at 2 different ways to look at IIP numbers. There is the 2 year pre-COVID data, but going ahead that may not be relevant any longer. That leaves us with the traditional yoy comparison, which is vulnerable to base effect and also fails to capture high frequency triggers. In contrast, there is the high frequency growth over the previous month and this captures short term IIP momentum. That is shown in the last column of the table. What are the inferences?

The MOM IIP indicator approximately corresponds with the purchase manager index (PMI) manufacturing trend. There are a number of high frequency indicators of growth like PMI, GST collections, e-way bills etc. One such supplementary measure is the MOM IIP growth. That is giving the first indication that the short term concerns over a volatile macro situation are getting adequately addressed.

If you look at MOM data, there is strongly positive growth across all the 3 segments viz. mining (+17.37%), manufacturing (+10.89%) and electricity (+18.78%). Overall MOM IIP growth at +12.52% is in stark contrast to the -4.69% high MOM IIP growth we saw in Feb-22. While it may be too early to arrive at a conclusion, it does indicate that some of the supply chain concerns disrupting production in the short run, may have been addressed.

RBI has made up its mind; it is inflation over growth

The April 2022 monetary policy may have still harped on growth, but a lot changes in monetary policy in a span of one month. The special MPC meet in early May 2022 culminating in a 40 bps repo rate hike and 50 bps CRR hike has sent a clear message. Till inflation is firmly reined in, the priority of the RBI would be inflation control and price stability. This is despite the fact that sustainable growth was still elusive.

Like the Fed, the RBI does not want to live under the “Inflation is Transitory” illusion much longer. Inflation at 7.79% for April 2022, with core inflation at 7.24%, has left little leeway for RBI on the rates front. There is no longer a dilemma for the RBI, as we had mentioned last month. The RBI has made up its mind; it is categorically going to be a preference for inflation control over growth levers.