Industry recovers but still in recession


The Index of Industrial Production grew by 20.5 percent in June 2020 over its level in May. It therefore continued its recovery path that began in May, for the second consecutive month. The IIP had shrunk by 54.3 percent in April. This was after shrinking by 12.7 percent in March and 2.3 percent in February. In May, it grew 67 percent before rising by another 20.5 percent in June.

Yet, the index at 107.8 in June was 16.6 percent lower than its level a year ago. It was also much lower than it was before the lockdown. The index is nearly 20 percent lower than its level in February, for example.

The impact of the lockdown on the first quarter of 2020-21 has been severe. The IIP during this quarter was 35.9 percent lower compared to its level a year ago. This also needs to be seen in the light of the fact that this was the fourth consecutive quarter of a year-on-year fall in the IIP.

Not only was the IIP in the red for three consecutive quarters before the lockdown dealt a body blow, it was also getting deeper into the red with every subsequent quarter. It was down by 0.4 percent in the quarter ended September 2019; then it was down by 1.4 percent in the quarter ended December 2019; and 4.3 percent in the quarter ended December 2019 before tanking 35.9 percent in the lockdown.

The index in the quarter ended June 2020 had nose-dived to 83.6.

In spite of a recovery in the IIP during May and June, the first-quarter index of each major economic activity index and each end-use index is lower than it was in any of the past corresponding first quarters. The decline in these indices in the June 2020 quarter compared to the previous year was between 15 and 65 percent.

By June 2020, a recovery was seen in two major sub-indices of IIP. These are electricity and consumer non-durables. The recovery in the former is also seen in the data released by the Central Electricity Authority. Electricity generation in June was higher than it was anytime since October 2019. This recovery has continued and even strengthened in July in respect of conventional energy which forms bulk of the total generation.

The recovery in electricity generation is somewhat intriguing because it is bereft of any corresponding increase in the rest of the industrial sector or even services because most of the services sector is still under a shutdown.

The recovery in consumer non-durables does not support the increase in electricity generation. The two are quite independent because consumer non-durables are not power-hungry products like steel and aluminium are. But, the recovery in consumer non-durables seems a lot more plausible. This is because it comprises largely of food products, beverages, tobacco and toiletries whose demand has recovered as the lockdown has eased controls on their production and movement.

Consumer non-durables also include pharmaceuticals whose demand could have increased under the current conditions where people are likely to have become a lot more careful in treating small infections or reacting to even minor symptoms in the hope of not having to visit a hospital or even a dispensary.

Product-wise details of production would be available after a few days. These would reveal the precise sources of the increase in this index. The initial release of the IIP only includes the broad index components.

The index of capital goods production has been the worst performer so far. The fall in this index was extraordinary in April. The index, which has a base of 100, was at 7.1 in the month. No major index has ever fallen so sharply. The index has since recovered but, at 64.3 in June 2020 it was still 36.9 percent lower than its level a year ago.

As the fall in April was surprising, the recovery during May and June is also astonishing. Capital investment is expected to be the biggest casualty during an economic lockdown. Production of capital goods is likely to suffer poor growth as a result. But, there is some traction in an associated industry which indicates that capital goods may not suffer too badly.

Hope is held out in the recovery seen in infrastructure and construction goods index. The index had fallen to 20.6 in April, but was back at 110.7 in June. This is still a distance from its level of around 145 before the lockdown. Yet, it is an exceptional rebound. Cement production has been growing well after April.

The gradual removal of lockdown restrictions and the consequent easing of movement of goods and labour are helping in the resumption of several stalled investment projects. It is likely that promoters are keen to complete outstanding projects. This can lend some traction to the production of construction goods and also capital goods.

The recovery in the IIP is therefore more in the nature of a “catch-up”. Consumers are catching up again on basic demand for consumption goods and entrepreneurs are catching up on suspended construction activities. None of this implies a recovery to normal industrial activities anytime soon. As of June 2020, the IIP was 16.4 percent lower than its average in 2019-20.

Recovery in the remaining part of 2020 – 21 could be more challenging than the gains made during May and June 2020. This is because household incomes have shrunk and governments are constrained by falling revenues because of the lockdown. The economy lacks sufficient demand buoyancy to fuel a complete recovery. Besides, the quarter ended June 2020 was the fourth consecutive quarter when the IIP registered a year-on-year decline. Industry was in recession before the lockdown. The lockdown just made it much worse. A recovery cannot be automatic or easy.




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