IIP growth up just 1.7% compared to pre-Covid periods, manufacturing lags

Flat growth may prompt the monetary policy committee not to go for an aggressive rate hike in August

India’s industrial production climbed to a 12-month high of around 20 per cent in May year-on-year but it is up just 1.7 per cent when calculated for the same month in 2019 before the coronavirus hit the country.

The flat growth may prompt the Reserve Bank of India’s monetary policy committee not to go for an aggressive rate hike in August to cool down retail price inflation, which was at 7.01 per cent in June and above the central bank’s mandate of six per cent for the sixth month straight.

The  growth in index of industrial production (IIP) decelerated in May from 6.5 per cent in April over the corresponding month of 2019.

Manufacturing output, which comprises more than three-fourth of the index, fell by almost one per cent in May 2022 compared to May 2019. Manufacturing scuppered IIP despite electricity generation expanding by 13 per cent and mining by 9 per cent.

The low-base effect was so pronounced that manufacturing showed a hefty 21 per cent growth in May year-on-year this time.

That is why the government press release on IIP has a note of caution, saying: "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."

April and May in 2020 and 2021 was the time when India was hit by the first and second waves of Covid.

Manufacturing might take time to recover since capital goods--required to boost production besides increasing existing capacities--declined seven per cent in April and eight per cent in May compared to the year before Covid-19.

Demand in the economy is struggling—a trend substantiated by consumer non-durables, which went down by 0.6 per cent in April but the rate of fall rose to 8.7 per cent in May compared to the corresponding months of 2019.

Similarly, the rate of decline in production of consumer durables rose from 12.7 per cent in April to 15.2 per cent in May compared to the previous covid period. This may be partly due to decline in production of motor vehicles, trailers and semi-trailers. However, their rate of fall came down from 7.6 per cent in April to 5.8 per cent in May over the respective 2019 figures.

One segment which is giving some solace to manufacturing is infrastructure and construction activities, induced by the government programmes. Their production grew 11 per cent in April 2022 over April 2019. Though it came down in May, it still grew by 5.6 per cent.

ICRA chief economist Aditi Nayar said the rating agency's business activity monitor had also revealed a tepid sequential momentum of economic activity in May 2022, similar to what the IIP has indicated. 

"With demand remaining uneven, we do not expect a sharp rate hike cycle from the MPC. We foresee rate hikes of 60 basis points spread over the next two policy reviews followed by an extended pause, as the MPC will focus on containing inflationary expectations without sacrificing growth," she said.

RBI governor Shaktikanta Das had on Tuesday said that the monetary policy is mindful of the economy's growth needs.