Why October IIP came in at an 8-month low despite festive demand, strong GST numbers

• Industrial output grew 3.2 per cent, the lowest in eight months, in October, with an uptick in mining and electricity output. Supply-side bottlenecks, especially related to coal and chips in the automobile sector, along with subdued investment and consumption weighed on the Index of Industrial Production (IIP) despite festive demand, data released by the National Statistical Office .
• The data, which comes with a lag of a month, points towards tepid economic recovery in the third quarter.

Concerns:

• IIP print reflects weak consumption and investment trends despite 25.3 per cent growth in GST collection and 7.5 per cent growth in core infrastructure sectors.
• Even though festive demand supported sequential growth, they said the heavy lifting to take the economy out of sluggish growth has to be done by the government.
• “Despite 25.3 per cent growth in GST collection and 7.5 per cent growth in core infrastructure sectors, October 2021 IIP growth was impacted by the base effect and grew 3.2 per cent only (October 2020: 4.5 per cent).
• The IIP growth has been very fragile and even festive demand was not able to uplift IIP growth in October 2021.
• “Worrying trends are also emerging on the investment front… industrial output is likely to follow the same trend as observed in the periodic labour force survey and weak private final consumption expenditure depicted in 2QFY22 GDP numbers.
• Omicron could be a disruptor in the coming months.
• Expect a weak set of IIP numbers in the rest of FY22. Weak consumption and investment trends imply that the heavy lifting to take the economy out of sluggish growth has to be done by the government.
• The output of the manufacturing sector, which accounts for over three-fourth of the total weight of the index, grew 2 per cent in October as against 3 per cent in September and 4.5 per cent a year ago.
• Mining output rose 11.4 per cent in October against a 1 per cent contraction a year ago, and power generation increased 3.1 per cent as against 11.2 per cent growth a year ago.
• Among use-based industrial classification, capital goods — an indicator of investment — contracted 1.1 per cent in October while consumer durables output contracted 6.1 per cent, and consumer non-durables output grew just 0.5 per cent.
• Only primary goods (9.0 per cent) and infrastructure/construction goods (5.3 per cent) provided some support to growth.
• Overall industrial output is still below pre-Covid levels, 99.6 per cent of February 2020.

Trend going ahead:

• The demand recovery is still being seen as tentative. “The supply-side bottlenecks on coal and chips are likely to persist into November, as evidenced by lacklustre auto sales.
• Other preliminary data for November also suggest a broad-based easing of the growth momentum, even as the economic reopening is supporting a pick-up in mobility and services…we expect GDP growth to moderate from 8.4 per cent y-o-y in Q3 to 6.3 per cent in Q4 and 5.2 per cent in Q1 2022.
• IIP is expected to be sub-3 per cent. “…consumer non-durables displayed a sub-1 per cent rise for the second consecutive month in October 2021, adding heft to the view that the demand recovery is as yet tentative.
• Even as the ongoing supply challenges in the auto sector persisted, the YoY performance of several other high frequency indicators deteriorated in November 2021, including electricity demand, GST e-way bills, port cargo traffic, etc, suggesting that economic activity lost steam after the festive season ended, with a satiation of pent up demand.
• Accordingly, the IIP growth may print sub-3 per cent in the just-concluded month, in spite of the low base (-1.6 per cent in Nov 2020),” Aditi Nayar, Chief Economist, ICRA Ratings said.
• The Reserve Bank of India in its recent monetary policy statement on December 8 had retained its GDP forecast for 2021-22 at 9.5 per cent. For the third quarter of October-December, it lowered the GDP forecast to 6.6 per cent from 6.8 per cent earlier."