Deceptive high industrial growth

by Manasi Swamy

The year-on-year growth in industry measured by the Index of Industrial Production (IIP), surged to 19.6 per cent in May 2022. This was way higher than the 6.7 per cent growth recorded in April 2022. This was also the highest growth recorded in the last 12 months. The growth, however, is deceptive. In reality, the industrial activity is not burgeoning as much as depicted by the y-o-y growth in the IIP for May 2022.

The IIP advanced sequentially by 2.3 per cent in May 2022 compared to April 2022. This increase was quite weak compared to the average increase of 5.5 per cent in May over April seen in the eight years before the coronavirus pandemic. Going against this seasonal trend, the IIP fell by 8.7 per cent in May compared to April last year due to disruptions caused by the second wave of coronavirus infections. This low base yielded the exceptionally high y-o-y growth of 19.6 per cent in the IIP this year in May.

The IIP in May 2022 was only 1.7 per cent higher when compared to the same month in 2019, that is before the coronavirus pandemic. This was lower than the 6.5 per cent growth clocked in April 2022 in a similar comparison.

The IIP growth in May 2022 over May 2019 was aided by a 9.1 per cent expansion in output of mined products and a 13 per cent growth in electricity generation. Output of manufactured products, which accounts for 77.6 per cent of the IIP, declined in May 2022, by one per cent compared to May 2019. Barring a few large industries like food products, chemicals, basic metals and other non-metallic minerals, most others struggled to raise their output above the pre-pandemic levels in May 2022.

The low-base effect in May 2022 was so pronounced that the manufacturing sector still recorded a robust 20.6 per cent growth y-o-y. The y-o-y growth in the mining sector amounted to 10.9 per cent and that in the electricity sector to 23.5 per cent, thereby yielding a robust y-o-y growth of 19.6 per cent in the overall IIP for the month of May 2022.

The May 2022 data of the IIP were pretty much in line with our expectations. We had anticipated the IIP to have grown y-o-y by 20 per cent. We expect the growth to ease in June 2022 as compared to May 2022. Yet, it would remain strong in the range of 11-12 per cent.

The June 2022 quarter IIP growth, therefore, is projected to average at 12.7 per cent. The growth is expected to taper down to 4.8 per cent in the September 2022 quarter, 4.5 per cent in the December 2022 quarter and 3.7 per cent in the March 2023 quarter as the low base effect wears off.

For the fiscal year 2022-23 as a whole, we expect the IIP to grow by 6.3 per cent. The manufacturing sector is expected to grow by 6.2 per cent. Industries like petroleum products, machinery, furniture and wearing apparels that could not recover completely from the pandemic last year are likely to claim the lost ground this year. We expect the petroleum products industry to step up its output by 5.8 per cent to cater to the increase in demand owing to withdrawal of all restrictions on mobility imposed during the pandemic.

Production of basic metals, which mainly comprises of steel, and that of non-metallic minerals, which mainly comprise of cement, is expected to grow by 6 per cent and 5 per cent, respectively, in 2022-23. A sustained demand from real estate and a modest improvement in infrastructural investments is likely to aid the consumption in these core industries.

We expect production of motor vehicles, trailers and semi-trailers to grow by 9.8 per cent in 2022-23. Their production had fallen by 18.4 per cent in 2019-20 and by 19 per cent in 2020-21. Production grew by 18.2 per cent in 2021-22, yet could not recover to its pre-pandemic level in 2021-22 due to semi-conductor shortages. We expect production to surpass its pre-pandemic level this year. But, production of other transport equipment is going to remain below its pre-pandemic level, despite reporting a 6.3 per cent rise in 2022-23.

Electricity generation is expected to increase by 9 per cent in 2022-23. Bulk of the growth has already come in the June 2022 quarter with generation having risen by 15.6 per cent, according to the data released by the Central Electricity Authority (CEA).

The mining sector is expected to grow by 4.2 per cent in 2022-23, backed by higher demand for coal from the electricity sector. Coal production is likely to grow in the range of 9-10 per cent, while production of crude oil and natural gas is likely to remain muted with a 0.3 per cent and 2.7 per cent growth, respectively.

The 6.3 per cent IIP growth projection for 2022-23, prima facie, may appear high. This is because it is dominated by an exceptionally high first quarter growth of 12.7 per cent that comes on a low base. Also, many sub-sectors in manufacturing could not recover completely from the pandemic last year. Some of these are expected to bounce back this year. Despite this, the average IIP growth during the pandemic and the post pandemic recovery period of 2020-21 to 2022-23 works out to 2.7 per cent. This is well below the pre-pandemic average annual IIP growth of 3.8 per cent seen during 2011-19.