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July IIP sees slower YoY growth at 11.5% as low base effect wears off –

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As the low base effect slowly wears off, industrial production in India expanded by 11.5 percent year-on-year (YoY) in July, down from 13.6 percent in June.

Measured by the Index of Industrial Production (IIP), data which was released by the Centre on September 10, industrial output has maintained significant growth from March, 2021, aided by a continuing low base effect. Case in point, industrial production rose by 28.6 percent in May and a massive 134 percent rise in April.

Experts said the indices for the current months in 2021 are not strictly comparable with the same months from 2020, when the nationwide lockdown was in full force and a majority of factories were not operating.

Consequently, there were many units which reported ‘Nil’ production, affecting comparison of the indices for May 2020 and May 2021. “The growth rates over corresponding period of previous year are to be interpreted considering the unusual circumstances on account of COVID 19 pandemic since March 2020,” the government said.

However, this effect is now slowly wearing off as industrial production is now being calculated based on their annual differences with months after the first wave was controlled, and lockdowns were lifted.

Manufacturing growth continues

In July, the manufacturing sector saw output increase by 10.5 percent, at a pace slower than the 13 percent rise in June. It had jumped by 34.5 percent in May and nearly 200 percent in April. Compared to July 2019, manufacturing output was lower by 2 percent.

Manufacturing had been in freefall for most of 2020 given the series of total lockdowns implemented at the national and regional levels. But inherent stress in the sector had become visible even before the pandemic hit.

In July, 20 of the 23 sub-sectors within manufacturing posted a year-on-year growth, up from 17 in June. Interestingly, the manufacturing of pharmaceuticals and medicinal chemicals continued to see a contraction in July, apart from furniture and tobacco.

Moneycontrol had earlier reported that while Q1FY22 is expected to see a large manufacturing growth, low base effect or otherwise, experts have warned it will not paint a realistic picture of the sector.

The crucial capital goods segment, which denotes investment in industry, rose by 29.5 percent in July. It had risen by a slower margin of 26.6 percent in June, after a 78.2 percent rise in May and a massive 1077 percent  rise in April.

Going forward

When compared with July 2019 however, the industrial output was just 0.3 percent less. “The data reveals that the industrial output in July 2021 is now 97.9 percent of February 2020. It had fallen to 94 percent of February 2020 level in April 2021. We believe that it will take a while for the industrial output to recover the grounds it has lost due to the impact of COVID 2.0,” Sunil Kumar Sinha, Principal Economist at India Ratings and Research (Ind-Ra) said.

In the coming months, greater focus would then shift towards sequential growth momentum, especially with the onset of the festive season, according to QuantEco Research.

“Broadly we expect macroeconomic conditions to remain in favour of a broadbased recovery in industrial activity, as reinforced by other related high frequency indicators such as GST, E-way bills, PMIs, Nonoil non-gold imports among others. Having said so, there are signs of some imminent downward pressure likely from the auto sector amidst production hurdles owing to semiconductor shortages,” a note from QuantEco Research said.