IIP stays in positive territory for second month at 3.6 %

India’s industrial output grew at the fastest pace in eight months in October 2020 at 3.6%, with consumer durables production surpassing levels last seen prior to the COVID-19 pandemic, as per quick estimates from the National Statistical Office (NSO) released on Friday.

This was the second month in a row that industrial output recorded positive growth, but economists were cautious about calling it a ‘turnaround’ as October’s numbers were bolstered by pent-up and festive demand and helped by a low base as the index of industrial production had shrunk 6.6% in October 2019.

The NSO also revised upwards its estimates for September’s industrial output growth from 0.2% to 0.5%, in light of updated data. Total industrial output so far in 2020-21 is now 17.5% lower than the April 2019-October 2019 period. Electricity generation grew 11.2% in October compared to a 12.2% decline a year ago, while manufacturing activity grew 3.5% in contrast to a 5.7% contraction October 2019. Mining shrank 1.5%.

“The broad-based growth in manufacturing is significant. Machinery growth has turned positive which is reflected in capital goods,” said CARE Ratings chief economist Madan Sabnavis.

“It needs to be seen if this positive growth can be sustained for another two months before we can conclude that there is a turnaround,” he added.

Capital goods recorded positive growth for the first time in 21 months in October. But primary goods continued to record negative growth (-3.3%) while intermediate goods recorded a tepid 0.8% growth, which suggests that the recovery is dissipated and uneven.

“The underlying strength of demand remains mixed, and is still tentative in some sectors,” said Aditi Nayar, principal economist at ICRA, who said October’s growth is ‘feebler than expected’ and November 2020 may record slower IIP growth or even a slide back into contraction mode.

“A variety of available indicators such as output of coal, electricity, non-oil exports and GST e-way bills have revealed that the pace of growth flagged in November 2020, on account of a combination of an unfavourable base effect, fewer working days related to the shift in the festive calendar, as well as some slack after the satiation of pent-up demand,” she explained.

India Ratings principal economist Sunil Kumar Sinha agreed, stressing that while two consecutive months of positive IIP growth is a good sign, one must wait for few more months to believe that the economy is firmly in recovery mode.

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