IIP continued to recover in Oct; Omicron impact to be less severe: FinMin

Department of Economic Affairs asserts that economic recovery to gain further momentum remaining two quarters of FY22

A day after the index of industrial production (IIP) portrayed a dim picture of factory production, particularly of capital goods, auto sector and fast moving consumer goods in October, the Ministry of Finance on Saturday exuded confidence that the economic recovery is likely to gain further strength. FinMin said that in the remaining two quarters of the current fiscal year the recovery will continue to be resilient after the second quarter yielded 8.4 per cent GDP growth.

However, the ministry counted Omicron variant of coronavirus as a risk to the global recovery while also citing preliminary evidence to bring home the point that the variant's mutation is expected to be less severe particularly due to increasing vaccination in the country.

In its latest monthly economic report for November, the Department of Economic Affairs said IIP continued to recover in October 2021, led by recovery in infrastructure and intermediate goods over their corresponding pre-pandemic levels.

It said IIP continued to recover in October this year to reach 108 per cent of pre-pandemic levels of October 2019, with 107 per cent recovery in manufacturing, 110 per cent in the mining sector and 115 per cent in the electricity sector.

"All use-based categories witnessed full recovery or more, with infrastructure and intermediate goods leading with 117 per cent recovery of October 2019 levels," the department said.

Within the manufacturing sector, industries like textiles,food, base metals, non-metallic minerals and computer electronics exhibited strong recovery when compared to corresponding pre-pandemic October 2019 levels.

DEA also pointed out that IIP grew at 3.2 per cent YoY in October as compared to 3.3 per cent YoY in September.

It should be noted here that unlike other parameters, comparing IIP of October with the corresponding October of pre-covid period 2019-20 will not give the correct picture. The reason for this is obvious -- IIP contracted 6.6 per cent in October, 2019-20. In fact, October, 2020-21 also showed a growth of 4.5 per cent over IIP of October, 2019-20.

In fact, IIP in October 2021-22 showed a grim picture of capital goods which represents investments, auto sector as well as fast moving consumer goods which should have been on the  upswing due to it being the festival month.

While capital goods' output declined 1.1 per cent in October, 2021-22 from 2.4 per cent growth in September, consumer durables continued to contract at a higher rate of 6.1 per cent from 1.9 per cent over this period. Fast-moving consumer goods also did not portray any rosy picture with output rising by just 0.5 per cent in October from 0.2 per cent in the previous month.

Within manufacturing, motor vehicles, trailers, and semi-trailers continued to show a decline in production. The segment contracted 12.6 per cent in October, higher than the 9 per cent fall in the previous month.  This may be related to the shortage of chips for automobiles. The manufacturing of other transport equipment declined 15.6 per cent in October, albeit lower than the 18.5 per cent in September.

Because of this, economists called the government to step up its expenditure to lift the economy.

For instance, India Ratings Chief Economist Devendra Pant said weak consumption and investment trends implied that the government had to do the heavy lifting to take the economy out of sluggish growth.

Barclays India Chief Economist Rahul Bajoria pinned hope on higher government spending, especially capital expenditure.

ICRA chief economist Aditi Nayar said," The disaggregated data does not provide convincing signals of the recovery becoming durable and broad-basing."

In its report, DEA said the economic recovery is expected to gain further strength in the remaining quarters of the financial year, as evident from 19 among 22 High Frequency Indicators (HFIs) in September, October and November of 2021 crossing their pre-pandemic levels in the corresponding months of 2019.

"Yet, Omicron, a new variant of COVID-19 may pose a fresh risk to the ongoing global recovery. However, preliminary evidence suggests that the Omicron variant is expected to be less severe and more so with increasing pace of vaccination in India," it said.

In so far as domestic impulses to growth are concerned, India’s recovery is aided by rapid vaccination covering at least one dose more than 90 per cent of the adult population. This has helped daily COVID-19 cases in India decline further in November, with month-end active caseload reaching its lowest since June 2020, concentrated in only a few states of the country.

Around 80 per cent of the active cases are in Kerala, Maharashtra, Tamil Nadu, West Bengal and Mizoram.

The report said the agriculture sector has been the foundation on which economic contraction in India was

minimized in FY21 and recovery sped up in FY22.