As per the recent data released, India’s factory output reportedly shot up by a significant 22.4% in the month of March, while retail inflation eased to a three-month low of 4.29% in the month of April as favorable base effects affected the economic numbers.
However, it is to be emphatically noted that the shimmering economic numbers give a false sense of normalcy as the rampaging second wave of the covid-19 and slow vaccine rollout campaign are widely expected to delay any fruitful or meaningful economic revival in Asia’s third-largest economy, India.
As per reports, Industrial output (IIP) in India expanded due to a low base effect in March. The industrial output grew by 22.4 per cent in march after contracting by 3.6 per cent in February.
The data was released by the center on May 12, which measures the industrial output by the Index of Industrial Production (IIP). According to the data released, it has been reported that the industrial output has been contracting since January. IIP had contracted by 0.9 per cent in January after rising by 1.6 per cent in December.
Aditi Nayar, the Chief Economist at ICRA stated that “The pace of the IIP’s expansion in March 2021 was in the middle of our forecast range (17.5-25.0%). Given the low base of the lockdown, we believe it’s more meaningful to compare the industrial performance in March 2021 with March 2019, which reveals a mild albeit sobering contraction of 0.5%,”.
Why high economic numbers don’t show the real picture?
It is to be noted that the latest significant rise in the IIP is mainly attributed to the manufacturing sector which saw a tremendous growth in output by 25.8 per cent. However, appreciable numbers come on an extreme low base, since from March 2020 the country began its cycle of nationwide lockdowns when the economy had plunged into its historic, deepest contraction ever. Back then, manufacturing output had slid by 22.8 per cent. Consecutively, in March last year, the index of industrial production (IIP) had contracted by 18.3% as factories had reduced operations with rising cases of coronavirus.
Last year, a spurt in coronavirus cases had forced the government to impose a nationwide stringent lockdown in March 2020. This had led to economic growth contracting by a significant 23.9% in the June quarter. Additionally, the core sector had contracted for six consecutive months from March to August of 2020. The Indian economy had plunged into its deepest recession in the financial year 2021 in more than 40 years.
Additionally, as has been reported, last year, the ministry of statistics and programme implementation was unable to compile a comprehensive, reliable inflation (CPI) data for the month of April and May because of the nationwide lockdown imposed to contain the pandemic and had therefore imputed inflation at 10.5% for the month of April. With various field visits put on hold last year due to the pandemic, reliable data for economic analysis was arduous to obtain.
picture credits- Mint
Thus according to Aditi Nayar, the Chief economist at ICRA Ratings, it is more meaningful to compare the industrial performance in March 2021 with March 2019, which reveals a mild contraction of 0.5%, given the low base of the lockdown. She further stated that “With the concentrated localized lockdowns seen in April 2021 becoming widespread over the recent weeks, we expect a surge in IIP growth in that month, which would recede considerably in May 2021. For instance, electricity demand growth surged from 23% in March 2021 to 40% in April 2021, before flattening to 22% in 1-11 May 2021,”.
As per reports, in March, of the 23 sub-sectors within the domain of manufacturing, only 3 posted a year-on-year contraction. This has come down from 17 sub sectors that had recorded contraction in the previous month. Sub sectors recording contraction are namely, manufacturing of tobacco products, refined petroleum and reproduction of recorded media.
On the contrary, electronics, electrical equipment, motor vehicles and pharmaceuticals saw the biggest growth. This is due to the fact that these sub sectors were hardest hit in March, 2020 when the nationwide lockdown was implemented.
Again, due to a low base effect taken for economic analysis, the crucial capital goods segment, which shows investment in industry, rose by a significant 41.9 percent in March. It had reportedly slid by 4 per cent in February and by 9.6 per cent in January, after growing by 1.5 percent in December.
As explained earlier, while the IIP is set to consistently register significantly high growth numbers but the real growth may be much humbler.
Aditi Nayar stated that “Based on the spikes in the YoY growth of GST e-way bills (+582.5%), non-oil merchandise exports (+200.7%), vehicle registrations (+214.7%), and rail freight (+70.4%), as well as a modest rise in the output of Coal India Limited (+3.7%), we expect the IIP to expand by a transient but relatively meaningless ~150% in April 2021 on the low base of the nationwide lockdown that was in effect in April 2020,”.
According to Madan Sabnavis, chief economist at Care Ratings, growth numbers from April to August will be highly impressive as there were five successive negative growth rates last year. He stated that “Hence, we should be guarded in our interpretation,”.
RBI to continue its accommodative stance.
A low retail inflation print recorded in April was driven by softening of the food inflation to 2.02%. During the month of April, while inflation of protein items such as meat, oils, fish, eggs, and fats rose in double digits, vegetable and ‘sugar and confectionary’ prices fell by 14.18% and by 6%, respectively. Reportedly, core inflation also eased to 5.4% compared to 6% in March. Among services items, inflation for healthcare and ‘transport and communications’ increased by 7.76% and 11.04%, respectively.
Due to the low base taken for economic analysis, inflation has taken a sobering tone. This will emphatically help the RBI to continue its accommodative stance to support the economic recovery.
Last month, the Asian Development Bank had projected the retail inflation to moderate to 5.2% in FY22 after rising by 6.2% in financial year 2021. This is due to good harvests and supply chain recovery which are expected to contain domestic food inflation even as food prices rise around the globe, though higher oil prices are expected to exert some inflationary pressure.
According to Radhika Rao, the senior vice president and economist at DBS Group Research the focus is back on inflation in light of the recent rally in commodity prices, as well as rising input prices faced by manufacturers. She stated that “While the smaller weightage in the CPI basket tempers part of the impact, WPI inflation is expected to quicken to above 9% in April, reflecting strong cost-push pressures. The onset of the second wave of the pandemic is likely to cap demand impulses because of a prolonged negative output gap, but potential supply disruptions in the midst of rising stringency of statewide restrictions will warrant attention. We expect the MPC to look through such price pressures as the fragility of growth takes precedence and as price pressures are expected to auto-correct as mobility restrictions are gradually unwound,”.