India’s industrial production swung wildly, posting a record expansion of 22.4% YoY in Mar-21 from a contraction of 3.4% YoY (revised up from a contraction of 3.6%) seen in Feb-21. To be sure, market expectations were geared towards an exceptionally strong print of 17-20% as per various polls on the back of an extremely favorable statistical base (with commencement of nationwide lockdown depressing the IIP base in Mar-20). However, the magnitude of actual expansion has surprised us on the positive side. Overall, IIP ended Q4 FY21 with a growth of 5.2% YoY, up from 1.7% seen in Q3 FY21. For the year as a whole, IIP expectedly, posted a record contraction of 8.7% in FY21 compared to a mild contraction of 0.8% seen in FY20.

On sequential basis, the IIP expanded by 10.6% MoM in Mar-21, marginally lower than the average (seen in the current data series with 2011-12 as base excluding Mar-20 data on account of the nationwide lockdown) expansion of 11.2% seen in the month of March. Nevertheless, it is fairly in line with the seasonal trend of year end ramp up in production activity.

The Internals: Favorable base effect reflected everywhere

• On the sectoral side, manufacturing played a vital role with record annualized expansion of 25.8%. This was ably supported by the electricity sector, which saw annualized growth in output scaling a more than 6-year high level of 22.5%. In comparison to these robust performances, the mining sector posted a staid growth of 6.1% on annualized basis.
• On the use-based side, record annualized growth was seen in case of capital goods (41.9%), infrastructure & construction goods (31.2%), consumer durables (54.9%), and consumer non-durables (27.5%). Intermediate goods expanded at a 13-month high of 21.2% YoY while primary goods performance posted a moderate expansion of 7.7% in comparison.
• At a granular level, all the 25 industries covered by the IIP posted a sequential expansion in production. Such an instance of complete coordination in sequential expansion within IIP has happened only thrice earlier in the current data series with 2011-12 as base.

Outlook

The exceptionally strong IIP growth in Mar-21 needs to be seen through the prism of statistical base, which will continue to create outliers for industrial growth over the next five months (IIP growth in Apr-21 is likely to surpass the record print seen in Mar-21 given the negligible industrial output in Apr-20). As a matter of fact, most of the high frequency indicators capturing industrial activity will manifest this trend on annualized basis. Eventually, this would manifest in a record growth in Q1 FY22 GDP for India.

Having said so, we note that the severity of Covid 2.0 is resulting in state level lockdowns getting pervasive and also stringent in May-21 vis-à-vis Apr-21. This has already started to impact daily mobility indicators. The Google Mobility Indicator for various categories is currently down to the subdued levels last seen in May-Jun 2020, i.e., towards the end of the stringent nationwide lockdown phase. In addition, some of the high frequency indicators released so far (automobile sales and GST e-way bills) have started to capture the sequential drop in activity levels in Apr-May 2022. This could potentially snowball into a larger drop in sequential activity since the second wave of Covid is yet to peak out and lockdown restrictions could stay until Jun-21, longer than our previous assumption of May-21. We believe this could then impart some downside risk to our FY22 GDP growth estimate of 10.0%.

Having highlighted the downside to near term growth prospects, we do acknowledge the silver linings as well:

• Global growth expectations have got marked up in recent months led by strong doubling down of fiscal policy support in the US and continuation of extremely accommodative monetary policies by major central banks. The IMF recently upgraded its forecast for World GDP growth in 2021 and 2022 to 6.0% and 4.4% from 5.5% and 4.2% (provided earlier in Jan-21) respectively. A supportive global economic backdrop will support India’s exports, which continue to show some degree of resilience despite the state level lockdowns.
• Although India’s vaccination drive has lost momentum off late, it is expected to pick up pace in the next 2-3 months via augmentation of existing domestic capacity as well as possibility of greenfield production and imports. Currently, India has covered 10% of its total population with a single dose of COVID vaccine. This could potentially move towards 45-50% before the end of 2021. This critical mass of vaccinated population would not just boost consumer confidence and enhance mobility, but it would also help in normalizing significant part of economic activity from COVID related disruptions.
• Last but not the least is the supportive domestic policy environment characterized by countercyclical fiscal impulses reinforced by the FY22 Union Budget amidst an accommodative monetary and liquidity backdrop that RBI remains committed to.

Table 1: Anatomy of IIP growth

Chart 1: Most categories of mobility indicators are now down to May-Jun 2020 levels