Is 134% jump in April IIP a good sign of recovery?

The good news is that Index of Industrial Production (IIP) surged by 134 per cent in the month of April, the data released by National Statistical Office (NSO) has revealed. Not to mention that IIP growth had been registered at merely 54 per cent in April last year.

So, is it a matter of rejoice at a time when we are hearing negative news from all around due to the spread of second wave of Covid-19, which kick started in April. But, hold your breath. The exaggerated IIP figure for April is due to base effect. It was in March-end last year when the national lockdown had been imposed by the government. Consequently, industrial production had come on a standstill across the country in April last year.

Approving this argument, the NSO data also says that the surge was due to nationwide lockdown to curb the spread of Covid-19 had resulted in production falling by more than half at most units. For starters, most units reported nil output because of total lockdown in April 2020.

The country's industrial growth technically jumped 134 per cent year-on-year in April from merely 54 per cent in the year-ago period, mainly due to the base effect. NSO data shows, the surge was due to nationwide lockdown to curb the spread of Covid-19 had resulted in production falling by more than half at most units. The real picture on the front will be out next month.

ICRA expects the IIP growth to flatten appreciably to under 20 per cent in May 2021, with an easing of the favourable base effect and the sequential moderation in volumes related to the second Covid surge and widening state level restrictions. Moreover, the IIP is expected to slip below the pre-Covid level of May 2019 in the just concluded month.

With the fresh cases having moderated substantially and a phased unlocking underway, analysts expect the sequential momentum to improve over a variety of high frequency indicators in June-July.

Now, there is a twist to the IIP growth story. A school of thought believes that rather than comparing the IIP growth in April on year-on-year basis, the better approach would have been to compare with the April, 2019 number. Given the comparability issues related to the lockdown in April 2020, analysts believe that assessing the growth in April 2021 relative to April 2019 provides a clearer signal of the underlying momentum in various sectors. In particular, intermediate goods recorded a heartening growth of 11.5 per cent in April 2021 relative to April 2019, which may partly have been driven by exports.

However, capital goods and consumer durables output trailed the April 2019 levels by 14.3 per cent and 11.6 per cent, respectively, which suggests that the widening state-wise restrictions over the course of the month did have an impact on production, given the weakening outlook for investment activity and consumption in the near term. If all goes well, we will see better factory output numbers from June onwards.