Expectedly, the industrial production (IIP) for April has contracted by 55% on a YoY basis. The manufacturing sector has contracted by almost 65% during the same month. With the nation-wide lockdown imposed to curb the spread of Covid-19 virus since the last week of March, industrial activities except for essential commodities such as food and medicine were on a virtual standstill in the month of April. The only sectors that recorded below 30% contraction include food, petroleum and pharmaceutical products. We believe that this has restricted the IIP’s fall beyond (-) 55% since the aforementioned sectors contribute to a significant share of around 22% in overall industrial production.

However, it is apparent that these numbers do not represent the steady state of the industrial sector as pointed out by the Ministry of Statistics. This time around, the Ministry did not represent the customary YoY percentage growth statistics for a lack of representation and stated just the index. Characteristically, the IIP time series does not show any abrupt trend as seen this month and is greatly influenced by base effect.

When we consider the previous April (i.e. April 2019), the index recorded a figure of 126.5, denoting a growth of 3.2% YoY. This year (i.e. April 2020), however, the index recorded just 56.3, denoting a growth of (-) 55%. A five year index average growth for the month of April is recorded at 3.5% and in the normal course, April 2020 growth should have been in the range of (+/-) 3% even taking into the account the slowdown witnessed over the last few quarters. Given the fact that FY20 as a whole recorded the lowest GDP growth in an 8 year history (since FY13), any moderate revival in the absence of Covid crisis may have led to an uptick in IIP given the favourable base effect.

As regards the use based categories, the most noteworthy impact was seen on Capital as well as Consumer Durable categories, which recorded an index of 7.7 and 5.5, respectively. While it will not be fair to compare these numbers with those of previous year or for that matter the index base of 100, a further analysis of the data reveals a disturbing picture. Due to complete shutdown, automobiles and electronics goods industry along with electrical equipment sectors have contracted by almost 100%. This sharp contraction in higher value adding sectors will magnify the loss in tax collections in the current quarter. The story is no different for the higher labour intensive sectors such as textile, wearing apparels, and leather, which have also contracted by over 95%. We expect that these developments will undermine the consumption power of the household especially the lower and middle income groups who work as contract labour in the labour intensive sectors.

As we move towards the May 2020 IIP print, we expect the contraction to be similar to that in April or even worse in some segments. In a Covid backdrop, the concept of favourable/ unfavourable base effect has been made irrelevant and will not drive the IIP growth or contraction trajectory in FY21 at least in H1. The principal concern remains on the Consumer and Capital goods categories, which are intertwined and reflect the overall health of an economy. Without the reactivation of either one of them, signs of fresh capital expenditure and consumption demand will be difficult to ascertain. While other categories such as Infrastructure/ Construction as well as Intermediate goods are on life support as well, recovery will be relatively swift as when labour availability improves and economic activities resume routinely from the second half of the year. To conclude, the first half of FY21 and specifically the first quarter has to be discounted as a black swan event and written off economically.

Table1: Growth in industrial production by economic activity (%)

Table 2: Growth in industrial production by usage (%)

Source: CMIE, Acuité Research