Impact of the lockdown on industrial production

by Yash Shah

The nation-wide lockdown since March 25 impacts the industrial sector significantly although sectors accounting for over 54 per cent of the Index of Industrial Production (IIP) by weight have been exempted. The nationwide lockdown announced by the Prime Minister was expected to end by April 14, 2020. The same has been extended to May 3, 2020 albeit with certain relaxations after April 20, 2020. This is an extraordinary shutdown that will leave a deep imprint on the Indian economy.

Electricity generation, production of steel, fertilisers, food, medicines, petroleum products and mining are exempt from the lockdown. Production activities continue in these sectors. There are exceptions to the complete lockdown and certain factories or industries producing non-essential goods will be permitted to operate in certain states after April 20, 2020 subject to guidelines issued by the Ministry of Health and Family Welfare. But, no industry can function in isolation when the rest of the economy is locked down. Even industries that have been exempted face problems of falling demand, shortage of labour and broken supply chains.

The first sign that industrial activities are adversely impacted even in the exempted sectors can be seen in the consumption of petroleum products in March.

Compared to a year ago, consumption of petroleum products declined 17.8 per cent in March 2020. This was the steepest fall in consumption since monthly petroleum consumption data started becoming available in 2004. Therefore, this is the worst fall in at least 16 years. Consumption of high speed diesel was down by 24.2 per cent, motor spirit by 16.4 per cent, aviation turbine fuel by 32.4 per cent, lubricating oil by 34.9 per cent and bitumen and asphalt by 41 per cent. All these falls are extraordinary falls in a month where the lockdown was only partial and the sector was exempt from production.

Coke and refined petroleum products account for about 11.8 of the IIP.

Media reports suggest that lack of demand may force oil companies to shut operations. Refineries are running at low capacity utilisation and storage capacities are strained.

Coal production was reported to be in full swing in March but, consumption has declined. Coal offtake from CIL fell by 10.3 per cent in March 2020. Inventories have been rising with coal companies and also with power generating companies.

Demand also constrains production of steel. According to Joint Plant Committee (JPC), gross production of finished steel recorded 27.4 per cent y-o-y decline in March 2020, worst decline since the beginning of the series in 1995. Only 6.7 million tonnes of finished steel was produced during the month. Monthly production of steel has been in the range of 8 to 9 million tonnes per month during 2019-20. Steel plants that operate large blast furnaces and coke ovens that cannot be turned off completely face a serious problem because of the lack of demand. Demand from infrastructure, construction, automobiles and consumer durables had all declined drastically. Steel accounts for 10 per cent of the IIP. JSW Ltd and SAIL have intimated the exchange, BSE about a considerable fall in capacity utilisation during the lockdown.

Generation of electricity accounts for another 8 per cent of IIP. Power generation in March 2020 was 8.8 per cent lower than it was in March 2019. Given the weak economic activities even before the lockdown, power generation had seen y-o-y declines during each of the four months September through December 2019. Now, March also pencilled a decline. Therefore, 5 of the 12 months of fiscal 2019-20 recorded a y-o-y fall in power generation.

Reports suggest that the average electricity demand fell from 3.5 billion units before the lockdown to 2.8 billion units as of March 25, the first day of the lockdown. This is probably reflected in the 8.8 per cent fall in the month as a whole. But, that also gives a preview of the possible decline in April which could be more than just the 20 per cent fall seen in the first day of the lockdown.

During the lockdown, demand from commercial and industrial sectors is expected to be subdued and demand from residential and public services is expected to remain stable. The latter account for 31.1 per cent of total electricity consumption.

Fertiliser companies have announced or are reported to have cut production substantially. Gujarat State Fertilizers & Chemicals Ltd (GSFCL) is the market leader in sales of di-ammonium phosphate (DAP). It has completely shut down one of its plants in western Gujarat while production in other plants has been cut by 50 per cent. Chairman of Nagarjuna Fertilizers and Chemicals, U. S. Jha said that the lockdown has resulted in a temporary shortage of urea and added that in spite of being an essential commodity, plants are not running on full capacity due to reduced workforce. Sales of urea fell by 19.2 per cent during March 2020, worst since March 2018.

It is possible that other fertiliser plants are working at better capacity than these. Nevertheless, the aggregate production may see at least a marginal fall during the lockdown.

Food products, which is also exempt from the lockdown has a relatively smaller share of 5.3 per cent in the IIP. Its importance in these times of course, is much higher.

As per media reports, Hindustan Unilever, ITC, Godrej, Parle and Amul have ramped up production during the lockdown. But, there are also reports of a lot of packaged food manufacturers functioning at low capacity. The main problem faced by the food industry is of lack of adequate labour in the farms and in the factories. The other problem is of broken supply chains - from farms to factories and from factories to distribution channels. According to Indian Sugar Mills Association (ISMA), sugar production dropped on a y-o-y basis by 20.2 per cent during March 2020 and 0.9 per cent during the first 15 days of April 2020.

Medicines, soaps, detergents and newspapers have also been exempted from the lockdown. Collectively, these account for 7.4 per cent of the IIP. While reports of their production conditions are fewer, it is likely that may also face at least some problems related to shortage of labour and broken supply chains. It is unlikely that medicines, soaps and detergents would suffer lack of demand at this time.

It is evident from the above that the exempted sectors also face huge challenges in ramping up production during the lockdown. Beyond these are those industries that are not exempted. It is fair to assume that they have shut down completely during the lockdown. They account for about 46 per cent of the IIP.

The impact of the substantial reduction in industrial production in the organised sector, that is covered in the IIP may be expected to be much higher in the unorganised sectors. As a result, industrial production will take a huge hit in spite of the exemption to over half the industries by weight in the IIP during the lockdown.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.7 -2.4
Consumer Sentiments Index
Base September-December 2015
46.3 -0.4
Consumer Expectations Index
Base September-December 2015
48.7 -0.6
Current Economic Conditions Index
Base September-December 2015
42.5 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Sep 19 Dec 19 Mar 20 Jun 20
New projects 3.25 5.55 3.91 0.68
Completed projects 0.85 1.66 1.73 0.24
Stalled projects 0.41 0.61 0.76 0.11
Revived projects 0.43 0.83 0.42 0.59
Implementation stalled projects 0.91 0.13 9.78 0.08
Updated on: 27 Sep 2020 3:28PM
Quarterly Financials of Listed Companies
(% change) Sep 19 Dec 19 Mar 20 Jun 20
All listed Companies
 Income -2.3 -1.7 -4.9 -28.1
 Expenses -3.1 -2.2 -1.8 -28.4
 Net profit -1.3 -10.8 -47.5 -41.1
 PAT margin (%) 5.3 5.1 2.4 5.3
 Count of Cos. 4,452 4,431 4,247 4,117
Non-financial Companies
 Income -6.3 -5.5 -8.9 -38.4
 Expenses -6.7 -6.4 -4.9 -38.4
 Net profit -13.8 -13.8 -48.5 -60.2
 PAT margin (%) 5.7 5.7 3.4 4.2
 Net fixed assets 10.4 12.9
 Current assets 4.9 3.0
 Current liabilities 5.0 4.8
 Borrowings 8.3 14.7
 Reserves & surplus 5.7 2.1
 Count of Cos. 3,328 3,307 3,201 3,102
Numbers are net of P&E
Updated on: 27 Sep 2020 3:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.3 0.9
 Expenses 9.9 13.5 1.3
 Net profit -40.3 22.2 -14.4
 PAT margin (%) 2.0 2.4 5.1
 Assets 10.9 9.3 9.8
 Net worth 7.5 8.6 6.4
 RONW (%) 3.5 4.3 7.1
 Count of Cos. 27,645 26,682 3,100
Non-financial Companies
 Income 8.7 13.8 -2.7
 Expenses 8.8 14.0 -1.9
 Net profit -9.0 23.4 -21.4
 PAT margin (%) 2.7 3.2 5.7
 Net fixed assets 7.1 5.3 15.3
 Net worth 6.1 8.5 3.7
 RONW (%) 5.7 6.9 9.3
 Debt / Equity (times) 1.0 0.9 0.7
 Interest cover (times) 2.1 2.4 3.4
 Net working capital cycle (days) 77 70 52
 Count of Cos. 22,442 21,605 2,329
Numbers are net of P&E
Updated on: 27 Sep 2020 12:32PM