Industrial recovery wore off in August

by Yash Shah

The index of industrial production (IIP) fell by 1.3 per cent in August 2020 compared to its level in the previous month. The index had recorded a five month high and touched 117.6 in July 2020. During August, the index fell down to 116.1, lower than industrial activity levels of March 2020. March 2020 reflected the impact of the lockdown rather severely although only one week during the month faced the strictest phase of the lockdown. At 117.2, the index in March was at a 46-month low. While industrial activity in July 2020 surpassed this, August witnessed a retreat.

The end-use composition of IIP suggests that, primary goods, infrastructure / construction goods and consumer non-durables recorded a month-on-month (m-o-m) fall in output in August 2020. Output of capital goods, intermediate goods and consumer durables continued to grow on a sequential basis during August, but the pace of their recovery declined.

Fall in output of mining & quarrying activities and electricity generation feed into the fall in output of primary goods during August.

Mining and quarrying activity fell by 5 per cent on a m-o-m basis in August. Production of crude oil, natural gas and coal, which make up for majority of mined products in the country, recorded m-o-m fall in August. Production of coal is seasonal in nature and is generally hampered by rains. As per index of eight core industries (ICI), crude oil output declined by 2.1 per cent in August 2020, compared to 4.2 per cent growth recorded in July. Natural gas production also fell on a sequential basis during August 2020.

117.8 billion KwH of electricity was generated in August 2020, compared to 121.5 billion KwH generated in July. Electricity requirement as well as peak demand for electricity fell by approximately 2 per cent on a m-o-m basis in August 2020.

Production of infrastructure / construction goods recorded a marginal contraction of 0.2 per cent during the month. Items forming a part of the basic metals and other non-metallic minerals industry make up for approximately 90 per cent of infrastructure / construction goods. There is a divergence in trends of other non-metallic minerals and basic metals indices during July and August 2020. Output of basic metals is rapidly improving with the index jumping from 129.7 in June 2020 to 157.1 in August. In contrast, index of other non-metallic minerals has fallen below 100 in August 2020. Index of other non-metallic minerals had touched 112 in June 2020. Thus, surprisingly, production of other non-metallic minerals like cement and cement clinkers is falling even as production of steel used in infrastructure / construction activities is rising.

Demand for consumer non-durables declined for the second month in a row in August 2020. Food products and pharmaceuticals account for around two-third of output of consumer non-durables. Manufacture of pharmaceuticals in August 2020 fell by 8.2 per cent over July 2020. Pharmaceuticals industry had fully recovered in May 2020 and recorded higher output during May-July 2020 compared to its previous year levels. In contrast, index of pharmaceuticals declined by 1.2 per cent on a year-on-year (y-o-y) basis in August 2020. After recording sequential growth for three months in a row, output of food products declined by 3.8 per cent on a m-o-m basis in August 2020.

Compared to July, output of capital goods improved in August 2020. Index of capital goods inched up to 75 in August 2020, surpassing March 2020 levels of 72.6. During August 2020, manufacture of machinery & equipment and electrical equipments recorded m-o-m growth of 13.6 per cent and 3.8 per cent, respectively. Even as production of capital goods increased in August, it is far from pre-lockdown levels. From 2011-12 to 2019-20, average of index of capital goods between April and August was 96.4. During April-August 2020, index of capital goods stood at 50.4. Thus, investments after the lockdown have fallen by nearly half of the average investments made in the eight years preceding 2020.

Output of consumer durables increased by 9.1 per cent on a m-o-m basis in August 2020. Around three-fourths of consumer durables can be divided into three broad categories of automobiles, electronics and wearing apparels. According to Society of Indian Automobile Manufacturers (SIAM), sales of passenger cars and two wheelers recorded double-digit m-o-m growth in August 2020. Pick-up in sale of cars led to the increase in output of consumer durables. As per reports, the increased sale of automobiles is not sustainable beyond the festive season. Expectations of a good festive season have soared up production of electronics and electrical equipment, as well. Positive impact of festive demand on wearing apparels is yet to be seen. Output of wearing apparels industry during August 2020 was still very far from its pre-lockdown levels.

Output of intermediate goods recorded m-o-m growth of 2.1 per cent in August 2020.

The manufacturing sector declined by 0.7 per cent on a m-o-m basis in August 2020. Output of 10 out of 23 manufacturing sub-sectors in August was lower than their production levels in July.

Output of primary goods, consumer non-durables and infrastructure / construction goods have pulled down the overall pace of recovery of IIP. Also, investment in capital goods is still far from its pre-lockdown levels. Output of consumer durables improved in August against the backdrop of increasing sales of automobile.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001091002005000000&repnum=111831&frequency=M&colno=1