Nov 12, 2021

INDIA | Sep-21 IIP

Enters the slow lane

Summary
India’s IIP growth slipped to a 7-month low of 3.1%YoY in Sep-21 with an adverse
base and sequential contraction in activity both at play. The month was a
testimony to supply side disruptions weighing on production, with the downside
thankfully getting capped by ahead of festive season led ramp up in consumer
durables sector. Amidst a barrage of divergent data on leading indicators, how
are we assessing the evolving growth situation in the economy? Read on to find
out as we attempt to answer five questions telegraphed on every reader’s mind.

Growth in India’s industrial production moderated into single-digits in Sep-21,

after a hiatus of 6 months, coming in at 3.1%YoY (consensus and QuantEco
estimate: 4.8%) compared to 12.0% in Aug-21.

Key highlights: For Sep-21 IIP growth

• In addition to the deceleration in headline growth, sequential momentum
too posted a contraction of a sizeable 2.6%MoM, on the heels of a marginal
dip of 0.1% in Aug-21. This stands in contrast to the average seasonal
expansion of 0.4% usually observed in the month of September (excluding
the pandemic year of 2020).
• On sectoral basis, electricity output contracted by a sharp 11.0%MoM.
Excessive rainfall in the month weighing on coal production and in turn its
availability amidst the global energy crisis, appears to have taken a toll.
• Manufacturing output too contracted, albeit by a marginal 0.5%MoM. In
terms of breadth of recovery of manufacturing sector, the sequential
expansion turned narrower in Sep-21, with 11 out of the 23 sub-sectors
showing a month-on-month expansion in production (vs. 13 in Aug-21)

Chart 1: IIP recovery vs. pre-pandemic levels complete at the granular level

Source: CEIC, QuantEco Research

 Sep-21 IIP: Enters the slower lane

• Within the manufacturing space, top 3 industries showing expansion in

sequential activity were Computer and electronics, Electrical equipment
and ‘Other manufacturing’. The bottom 3 industries recording a
contraction in sequential activity were Food, Paper and Other Non-metallic
mineral products.
• On the use-based side, the performance was quite diverse. Consumer
durables recorded a strong sequential growth of 6.7% ahead of the festive
season followed by Capital goods at a tepid (but positive) growth of 0.5%.
All other sub-sectors recorded a deceleration in momentum.
• Given the performance of consumer durables in Sep-21, recovery in IIP vs.
pre-COVID levels now stands complete at granular level too. Recall, while
the headline index had surpassed the 2-year ago level in Aug-21, consumer
durables output was below comparable Aug-19 level.

Adjusting from rear view to forward view

IIP growth is somewhat of a rear-view assessment of the economy, though it does
serve well to gauge the changing colour of recovery on a sectoral and industry basis.
We assess 5 forward looking questions on growth below –

Ques1. How has economic activity fared in Oct-21?

Our proprietary DART (Daily Activity and Recovery Tracker) index, which is an
aggregation of several ultra-high frequency indicators (i.e., on a weekly basis),
validates recovery in economic activity continuing well into the month of Oct-21.
Sequentially, the pace of recovery though gave up some momentum compared to
Sep-21, owing to a continued decline in electricity generation and festive holidays
related seasonal dip in activity. Nevertheless, Oct-21 was a testimony to Google
mobility to Parks, Workplaces and Retail & recreation moving above or coming
close to baseline of zero for the first time since onset of the pandemic. In addition,
generation of E-way bills soared to a record high. This rebound was aided by the
festive season that catapulted the nearly inseparable pent-up and vengeance
demand, as COVID cases continue to trend lower and vaccinations accelerate.

Further, our channel checks indicate inventory restocking related to festive season
being more dominant in Oct-21 this year (vs. Sep-21). This is because uncertainty
with respect to both – 1) Resurgence of COVID infections and 2) Palpable signs of
demand strength, led to a backloaded ramp-up in festive season production.

Chart 2: DART index validates recovery in economic activity in Oct-21

Source: QuantEco Research

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 Sep-21 IIP: Enters the slower lane

Ques2. So, will IIP growth rebound in Oct-21?

Unlikely, with favourable statistical base effect having gotten tapered completely,
the annualized growth in IIP is likely to remain in single digits in H2FY22. Having
said so, the emphasis will shift to looking at sequential momentum here on as that
would be truly representative of the underlying changes in activity. We remain
sanguine of sequential momentum continuing to remain in positive amidst -
• Central government capex clocking a healthy pace of 38.3% YoY in H1
FY22, up significantly from -11.6% over corresponding period in FY21.
• Festive season induced consumption recovery spilling beyond Sep-Oct-21

Ques3. How do we assess the current headwinds?

• Supply chain disruptions especially of semiconductors continue to
linger globally, and may take still a few months to revert to normal.
Reflecting its impact in domestic market, passenger vehicles wholesale
volumes declined by 27%MoM in Oct-21, as per automobiles industry body
SIAM. More recently, India's largest carmaker Maruti Suzuki also reported
a similar magnitude of production cut in Oct-21.
• Elevated commodity prices have led to a surge in input costs, weighing
on producer margins of the manufacturing sector. While several companies
across sectors such as FMCG, Chemicals, Apparels, Electronics, Auto have
resorted to calibrated upward price revisions, but these are inadequate to
offset the sharp and swift rally in raw material prices. This is likely to get
reflected in corporate earnings of manufacturing sector for Q3 FY22.
Having said so, the recent cut in excise duty/VAT on fuel prices does stand
to offer some respite in logistics costs, at the margin.
• Marginal slowdown in global growth momentum notwithstanding,
domestic exports are likely to remain buoyant.

Ques 4. Is growth in services poised to overtake manufacturing?

Services sector, which is the dominant sector in India’s GDP, is showing signs of a
quick turnaround. Lockdown restrictions have progressively eased with
recreational, tourism, dining, movie theatres and most other services being opened
up. Not surprisingly, services PMI accelerated to over a decadal high of 58.4 in Oct-
21 compared to 55.2 in Sep-21, leading firms on improved demand to hire at the
fastest pace in last 18 months. If this momentum continues, services sector could
offer greater support to incremental growth compared to manufacturing.

Ques 5. Can the current recovery continue into Q4FY22 and beyond?
The sustenance and strength of the current recovery continuing into Q4 could get
somewhat muted from the lagged impact of supply side disruptions and elevated
commodity prices. Further, the risk of a rise in COVID infections post the festive
season imparts an element of uncertainty, as several countries are seeing a surge
in cases with onset of the winter season. Progress on vaccinations, with a focus to
close the gap between the first and second doses (as a % of population; currently
at 54.5% and 25.8% respectively) will help abate economic consequences of a third
wave, if any. We expect a near 100% coverage of eligible population to be
fully vaccinated by Feb-22. This will be a strong pivot for consumer
sentiment and demand recovery in Q4 FY22 and beyond. As such, we
continue to retain our FY22 GDP growth estimate of 10% with mild
downside risks.

Additionally, recent reforms by the government focusing on infrastructure

development, asset monetization, taxation, telecom and banking
sector should boost investor and industry confidence, enhance
capacity expansion and facilitate crowding in of private investment. The
structural step of providing production-linked incentives (PLI) augurs well for
domestic manufacturing and exports in the medium to long term.

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 Sep-21 IIP: Enters the slower lane

AUTHORS: QuantEco Research

Author Name 1 Author Name 2 Author Name 3

Economist Economist Founder
+91 9871588331 +91 9867122910 +91 9820037413
yuvika.singhal@quanteco.in vk@quanteco.in shubhada.rao@quanteco.in

About QuantEco Research

QuantEco is an independent research house providing business economics and financial markets intelligence to corporates and
investors. Powered by decades of rich industry experience, Dr. Shubhada Rao is leading the research team at QuantEco, which blends
cutting edge analytics with qualitative analysis to assess emerging trends in the Indian economy.

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