The Index of Industrial Production for the month of July 2021 turned in an encouraging 11.5% growth compared to the same month last year, data released by the Ministry of Statistics showed. While base effects and the debilitating impact of Covid waves are well known, economists are eyeing comparisons with the normal year of 2019-20 to gauge how far this crucial indicator of economic health has bounced back. A deeper look tells a few stories beyond the headline number and therefore points to possible economic actions that can help the recovery along
The index number for July 2021 stands at 131.4 as against 117.9 year-on-year. The relatively high growth number is a result of base effect, since the economy was still reeling under the impact of the COVID-19 first wave in July 2020. The base effect is also evident in the figures from the first few months of FY22.
Index of Industrial Production or IIP measures the short-term changes in the volume of production of a basket of industrial products in any given month with respect to the chosen base period. IIP captures data in the sectors of mining, manufacturing and electricity and gives an idea of the general level of industrial activity in the economy.
The data is also released with a “use-based” category break up of; primary goods, capital goods, intermediate goods, infra/construction goods, consumer durables and non-consumer durables. Hence, as a high frequency indicator, IIP broadly captures the trends in the manufacturing sector of the economy.
IIP data: A pre-pandemic & current financial year analysis
DK Srivastava, Chief Policy Advisor at Ernst Young India is of the view that the index is not yet back to pre-pandemic levels because of the COVID second wave.
Analysis of the components of IIP – both at the broad level and the use-based approach – point to recovery.
However, all index values are not back to the pre-pandemic 2019 levels.
Sachchidanand Shukla, Chief Economist at Mahindra Group feels that the year-on-year IIP data comparison would tend to hide some of the finer details that have emerged in this ongoing financial year. Giving an example he tells TOI, “If one were to compare the Labour Intensive IIP and Capital Intensive IIP segments, there is a clear widening of gap.”
Labour Intensive IIP vs Capital Intensive IIP (Image source: Mahindra Group)
As evident from the graph above, the average gap between the two which is usually around 15%, has now more than doubled to 35%. “This would have manifested negatively at the ground level given the labour intensive nature of these select sub segments,” Shukla said.
The road ahead:
Bidisha Ganguly, Principal Economist at CII states that data over the next 6-8 months will help understand if the recovery in IIP, which has been very slow, is sustaining. According to Ganguly, one of the key factors holding back a strong bounceback is the lack of demand. “Capacity utlisations in several sectors is at 70% which means that even with an increase in demand, the existing capacity will be enough to absorb it. Companies are not expanding because of lack of demand, which in turn is a function of employment and salary levels not being back to the pre-pandemic levels,” she told TOI.
At the policy level, she believes that the government should frontload capital expenditure. “There is need for public investment in order to crowd in private investment across sectors,” she said. Crowding in happens when the private sector feels encouraged to invest on the back of economic growth driven by government expenditure. Ganguly also recommends that the government should settle pending and disputed payments to increase liquidity for the private sector.
Shukla of Mahindra group advocates continued focus on vaccination. “Output & job growth can see sustained revival only with a vaccination-based strategy as against a lockdown based strategy and continued monetary & fiscal support as evidenced from some of the developed economies such as the US,” he said.
Srivastava of EY expects a sustained recovery in the coming quarters. “Inadequate capacity utilisation is holding back a good recovery, but as there is accelerated capital expenditure by the government, private investment will also pick up,” he said. “Additionally, as demand for the formal manufacturing sector picks up, it will also feed into the auxiliary MSMEs that provide components. This will lift overall consumption demand,” he added.
However, according to Srivastava, IIP showcases just one aspect of the growth recovery. “The services sector, especially hotel & allied sectors are yet to pick up, and they are an important part of the sustained economic recovery picture,” he said. In encouraging signs, the August services PMI rose to 56.7 – exhibiting an expansion after several months.
Meanwhile, India’s GDP grew at a record 20.1% in the first quarter of FY22 – however at Rs 32.38 lakh crore it is still less than Q1 2019-20 figure of Rs 35.35 lakh crore. Clearly a stronger recovery will require constant fiscal and monetary policy support for India to comprehensively emerge from the economic impact of COVID.