India IIP: Industrial Activity Continued To Contract In May But At A Slower Pace

India’s industrial output continued to contract sharply over a year ago, even though it showed a marginal pick up over the month of April, when the nation went into a near complete lockdown.

The Index of Industrial Production contracted by 34.7% in May over last year, compared to a revised contraction of 57.6% in April. Twenty eight economists polled by Bloomberg had forecast May IIP contraction at 37.8%.

Like in April, the government refrained from providing the year-on-year change and only released index numbers. As such, the change in industrial output and its components has been computed by BloombergQuint using index data for May 2019 and May 2020.

A majority of the industrial sector establishments were not operating from the end of March, 2020 onwards, in view of the pandemic, said the government release. This has had an impact on the items being produced by the establishments during the period of lockdown and the subsequent periods of conditional relaxations in restrictions.

The IIP data for May 2020 confirms our conviction that economic activity hit a trough in April 2020, and will record an uneven recovery in the subsequent months, said Aditi Nayar, principal economist at ICRA.

However uncertainty persists. The rising infections and imposition of localised lockdowns in many states, are raising red flags about the pace of normalisation that we should expect in the ongoing quarter, Nayar said.

Rahul Bajoria, chief India economist at Barclays, said that the economy is expected to continue to experience a rough patch through the April- June 2020 quarter, though signs of green shoots, especially in the rural economy, are starting to appear as we enter July.

Segment-Wise Output

Among the three key sectors, manufacturing and mining continued to see steep contraction while electricity output fared better.

• Manufacturing output saw a contraction of 39.3% in May compared to a contraction of 67.1% in April.
• Mining output contracted by 21% in May, compared to a contraction of 26.9% in April.
• Electricity generation contracted by 15.4% compared to a contraction of 22.9% in April.

Industrial output, as classified by the end-use of goods, indicated a contraction across segments, like in the previous month.

• Primary goods output contracted by 20% in May compared with 26.6% in April.
• Capital goods output contracted by 64.3% as against a 92% contraction in the previous month.
• Consumer non-durables output contracted by 11.7% in May compared to a fall of 48.7% in April.
• Intermediate goods contracted by 44.1% in May, compared with a contraction of 65.4% in the previous month.
• Infrastructure and construction goods output contracted by 42% compared with a fall of 84.7% in April.
• Consumer durables contracted by 68.4% in May, after recording a contraction of 95.9% in April.

Details of the IIP data show that barring the pharmaceutical sector, every other major sector contracted for the third consecutive month in May, said Bajoria. However, several labour intensive sectors showed material improvement in May, and these trends are likely to continue in June, he added. ‘

IIP is estimated to contract 15-20% in June, according to Nayar, lead by a temporary uptick due to pent-up demand. Sales across certain categories within small-ticket and mid-ticket consumer durables category saw a pick-up in the initial days after restrictions were partially lifted. However, this may not sustain, Nayar said.