We are all familiar with index funds which are a basket of some top stocks in a market, For eg. Sensex. We say markets are up when the index is up and vice versa. Similarly, there is an index for the country's industrial activity called Index of Industrial Production (IIP). It is measured mainly to quantify the industrial output of the country and is basically a weighted average of the output of core sectors like mining, oil, coal, cement, electricity etc.
IIP has strong significance as it is an indicator of how much is the country producing or more specifically what is the growth of this output on a year-on-year basis. So these IIP numbers help the economists predict the GDP growth and growth of key industries. Needless to say, it is an important metric for policymaking.
In June 2020, this index contracted 16.6% on a year-on-year (YoY) basis. Sounds bad, but it is actually a positive sign as the contraction in May was 34.7%, and in April it was extremely bad at 57.6%. So there is a positive trend as contraction has reduced every month. Mining output, Manufacturing output, and Electricity output also contracted YoY, but the trend is positive as the extent of contraction in June reduced significantly. In between all this, Consumer non-durables – which include food items, personal care products etc.- showed no contraction, instead, it posted a growth of 14% YoY.
So it is clear that the country is getting back on track. Factories are reopening, demand is improving and workers are going back to work. But for the IIP to post growth instead of contraction it will have to continue with a strong positive trend in the months of July, August and September as good June numbers maybe only on the back of pent-up demand.
Some economists have stated that the GDP growth in the quarter of April-June is -25% YoY and experts predict the GDP growth for the entire year will be between -6.5% to -9.5%. For context, India’s GDP has been growing 6-7% on average in the past few years. So a negative growth would mean job loss, shut shops and lower spend on infrastructure.
Key Takeaways:
IIP growth was low in FY20 but it contracted in the past 3 months. It is now showing a positive trend as lockdown restrictions are relaxed. Still, the IIP has a long way to go as the world copes with the after-effects of lockdown.
It is a #Teji for the economy as lower IIP contraction means there is a rising demand for Electricity, FMCG, Raw materials etc. So to minimize the damage caused by the COVID we need to push to normalize things as fast as possible. Then IIP will soon enough tell us if we are on the right track or not.
