A broad-based recovery

by Manasi Swamy

The Index of Industrial Production of manufactured products is seen reporting a sustained recovery from the shock of Covid-19 induced lockdown. The index had slumped year-on-year by 22.8 per cent in March 2020. The fall aggravated to 66.6 per cent in April 2020, when the lockdown was at its peak. The index remained lower than its year-ago level in the subsequent months. But, the magnitude of fall did reduce gradually to 37.9 per cent in May 2020, 16 per cent in June 2020, 11.6 per cent in July 2020 and further down to 8.6 per cent in August 2020.

The improvement was broad-based. Over 80 per cent of the 405 manufactured products that form the manufacturing IIP, fared better in August compared to their performance in April. But, a majority of these managed to only reduce the magnitude of the y-o-y fall. 67.6 per cent of the manufactured products remained in the red in August. This proportion was 91.4 per cent at the peak of the lockdown in April, which came down gradually to 86.8 per cent in May, 73.1 per cent in June and 70.9 per cent in July and reduced further in August.

In April, 70.4 per cent of the manufactured products had suffered over 50 per cent fall in production. Their proportion dropped to 47.8 per cent in May as factories started buzzing once again. The manufacturing activity picked pace thereafter, and the proportion of products reporting more than 50 per cent fall dropped to 17.1 per cent in June and further down to 10.9 per cent in July and 10 per cent in August.

A majority of these products settled at a lower y-o-y fall compared to April. A little over 20 per cent products reported fall in production of up to 10 per cent, while another 26.7 per cent reported fall in the range of 11 to 30 per cent in August 2020. As many as 98 products, that is nearly a fourth of the product basket, returned to growth by August, recovering from the slump witnessed in April.

Twelve per cent of the manufacturing products reported up to 10 per cent growth in output in August, 11.5 per cent reported a growth in the range of 11-30 per cent, while five per cent products fared even better with the growth ranging between 31 and 50 per cent and another four per cent reported an exceptionally high growth exceeding 50 per cent.

Alternate data sources suggest that the industrial activity is likely to have gathered further momentum in September 2020. Large industries like steel, passenger cars and two-wheelers, whose output was lagging behind their year-ago levels, returned to growth in September. A four per cent y-o-y increase in demand for electricity in September, after six months of fall in a row, a 3.9 per cent increase in GST collections, 9.6 per cent rise in e-way bills generation, 15.5 per cent rise in railway freight traffic, six per cent growth in exports only suggest that the recovery must have been across-the-board and not confined to a few large sectors.

Early results of listed manufacturing companies support this. Net sales of 138 companies rose y-o-y by 2.4 per cent in the September 2020 quarter. This may deteriorate to a y-o-y fall as more companies declare their results. But, the magnitude of fall in sales in the September 2020 quarter for sure would be substantially lower than the 44 per cent fall suffered in the June 2020 quarter.

Producers have started turning optimistic about the future. The business expectations index, based on responses of 959 companies surveyed by the Reserve Bank of India (RBI), at 111.4 in September 2020, not only recovered from the all-time low of 99.5 it had hit in June 2020, but also exceeded its levels in the preceding three quarters. The business expectations index measures expectations of businesses of their own performance in the following quarter.

The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 56.8 in September 2020, its highest since May 2013. The Manufacturing PMI estimates are based on responses of around 400 manufacturers. It considers variables like new orders, output, employment, stocks of purchase and suppliers’ delivery times.

The festive month of October brought more cheer to producers. Aggregate sales of goods by e-commerce companies like Flipkart and Amazon jumped 55 per cent to Rs.290 billion during 15-21 October 2020 amid the mega festive sales. India’s top consumer electronics companies including LG, Samsung, Sony, Xiaomi and Vivo reported 10-20 per cent increase in their sales during the Navratri-Dussehra period, while car manufacturers delivered over 200,000 units recording 20-30 per cent jump in sales, according to media reports.

The Indian industry seems to be treading its recovery path well, with a broad-based improvement in production and manufacturers re-gaining the confidence to steer future growth. Pent-up demand after the lockdown and festive demand have had a significant contribution in this recovery. It is imperative for the sustainability of the recovery that Indian consumers’ ability and willingness to spend continues to grow.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&&tabcode=001091002005000000&repnum=115029&frequency=M&colno=1&parnum=115028&parfrq=M