Industrial growth expected to recover after November pause

by Manasi Swamy

After beating its year-ago levels for two consecutive months - September and October 2020, the Index of Industrial Production (IIP) fell year-on-year by 1.9 per cent in November 2020. This fanned the fears that the industrial recovery could have worn off post a frenzy of lockdown-induced pent-up demand and fresh festive spending. But, the decline seemed more to be a result of fewer working days available in November this year compared to last year. Moreover, many fast frequency indicators released by various industry bodies and some by the government too suggested that the industry managed to carry forward the improvement in demand seen during the festive season in to December.

Last year, November had four Sundays, whereas this year, it had five Sundays. Besides, Diwali and Chhat Puja fell in November this year as against October last year. Workers are usually on festive leave on these days, which affects the industrial activity negatively. Ideally, the loss of at least two additional working days this year should have resulted in 7-8 per cent y-o-y contraction in industrial output. But, the IIP reported a much smaller fall of 1.9 per cent.

Capital goods output declined y-o-y by 7.1 per cent in November 2020, after growing by 3.5 per cent in October 2020. Characteristically, the industry is prone to wide fluctuations in production because of the bulky nature of capital goods. Standard deviation of monthly growth rates of capital goods production before the lockdown was 8.6 per cent, much higher than the standard deviation of 3 to 5 per cent in growth rates of other use-based components of the IIP.

Output of primary goods declined y-o-y by 2.6 per cent in November 2020. The fall, in fact, was lower than a 3.2 per cent contraction seen in the preceding month. Primary goods mainly comprise of electricity and refinery products. Of these, electricity generation grew y-o-y by 3.5 per cent in November 2020. But refinery products industry continued to suffer a y-o-y contraction for the ninth consecutive month. Demand for two main petroleum fuels - diesel and aviation turbine fuel (ATF) - has been hit hard this year. Diesel consumption has fallen due to a shift in goods transport away from road in favour of railway freight and ATF consumption has been affected by the restrictions imposed by the government on operations of the aviation industry.

Consumer goods production declined y-o-y by 0.7 per cent in November 2020, while output of infrastructure/construction goods increased by an equal magnitude during the month.

Intermediate goods production declined y-o-y by three per cent in November 2020, after rising by 2.1 per cent in the preceding month. Although an unfavourable base was largely responsible for this y-o-y contraction, output fell sequentially too. This does not bring a good tiding. Intermediates are used as inputs in production of consumer and capital goods which are directly consumed by the end users. A contraction in intermediates’ output could be a warning sign of an impending slowdown in demand.

However, most fast frequency indicators reported a healthy growth in December 2020 and some in the first fortnight of January 2021 too, thus ruling out a possibility of an immediate industrial slowdown.

As per data released by the Society of Indian Automobile Manufactures (SIAM), production of passenger cars grew y-o-y by 22.2 per cent and that of two-wheelers by 9.1 per cent in December 2020. Tractors production grew y-o-y by a whopping 86.5 per cent during the same month, according to the Tractor Manufacturers’ Association (TMA).

Production of sugar grew by a robust 19.7 per cent y-o-y in December 2020 and by 1.7 per cent in the first fortnight of January 2021, as per data released by the Indian Sugar Mills Association (ISMA).

IHS Markit PMI of manufacturing stood at 56.4 in December 2020, reflecting a significant expansion in the industrial activity. The PMI is constructed from responses of 400 manufacturers regarding their performance on new order receipts, output, employment, suppliers’ delivery time and stock purchases.

Fresh orders received by machinery and industrial & infrastructural companies also increased y-o-y by 21.1 per cent in 2020, after recording a 44.4 per cent growth in November 2020, as per data compiled by CMIE’s Industry Outlook Service.

India’s merchandise export earnings grew y-o-y by 0.1 per cent in December 2020. This was their second rise since the lockdown. The improvement continued in January 2021, with exports rising by 10.9 per cent y-o-y during the first 14 days of the month, according a report in Economic Times.

On the flip side, core industries - steel and refinery products put up a weak performance in December and January.

Finished steel production declined y-o-y by 4.2 per cent in December 2020, according to data released by the Joint Plant Committee (JPC). Apparently, steel companies had to revise their production schedules due to soaring iron ore prices. Domestic demand for steel rose y-o-y by 5.7 per cent in December 2020. Steel companies met five per cent of this demand through liquidation of inventories. Finished steel inventories dropped to 10.6 million tonnes or worth 1 month and 5 days’ consumption by end December 2020, as compared to inventories of 13.3 million tonnes or worth 1 month and 16 days’ consumption at the end of December 2019, as per JPC data.

Refinery products was a different story, where demand for diesel and ATF continued to languish. Diesel consumption fell y-oy by 3.5 per cent during the first fortnight of January 2021, while ATF consumption fell by 48 per cent. Petrol and LPG consumption, on the other hand, continued to grow, by 8.5 per cent and five per cent, respectively.

The electricity sector continued with its healthy growth performance in December 2020, with conventional power generation rising by 4.6 per cent over its year-ago level. In the first 13 days of January 2021, the growth in generation averaged 2.4 per cent. Coal production grew y-o-y at a slow pace of 0.4 per cent in December 2020.

The y-o-y fall seen in index of industrial production in November is disappointing but it is unlikely a sign of weakness of the recovery process. Data for December for some of the major components of IIP indicate that the recovery process has continued into December and in January as well. The recovery so far is most likely a reflection of pent-up demand and festive demand. These do not last. The apparent sustenance of this recovery into December and January is welcome but surprising. Therefore, there is some uncertainty of what the drivers of a further recovery or a sustenance of the recovery into the coming months would be.

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