Factory output falls almost 10% in FY21
But, retail inflation slowed to 4.3% in April—123 bps less than its March level
NEW DELHI: The Covid-19 pandemic shrunk India’s factory output by almost 10% in 2020-21, the biggest shock to manufacturing activity since 1982-83, the earliest period for which Index of Industrial Production (IIP) data is available.
To be sure, the headline annual IIP number hides the complete collapse in industrial activity due to the 68-day-long complete lockdown which was imposed on March 25, 2020, and a subsequent patchy recovery. Even though the March IIP numbers, which were released on May 12, have a strong base effect, they suggest it might have been a good month for the economy.
Retail inflation data for April, however, suggests that the headwinds to rural demand might create additional problems for
the economy, which has been ravaged by the second wave of Covid-19 infections.
The IIP grew by 22.4% in March 2021 over the corresponding month last year. This huge spike needs to be seen in the context of an 18.7% contraction in March 2020. Because IIP numbers
underwent large contractions in the six-month period beginning March 2020—the numbers were 18.7%, 57.3%, 33.4%, 16.6%, 10.5% and 7.1% from March 2020 to August 2020—the base effect will continue to cloud IIP numbers up to August.
But the number also makes one thing clear—industrial activity more than regained last year’s level in March, although the raging second wave and lockdowns imposed in most states and Union territories could see a different story in May and June. The March recovery holds across use-based and economic activity-based comparisons, with consumer non-durable category showing the biggest improvement.
The Nomura India Business Resumption Index (NIBRI), which peaked at 99.3 in the week ending February 23, just 0.7 points below pre-pandemic levels of activity, was slightly lower but stable in March with weekly values ranging from 95 to 94.6. It fell sharply from its April 4 value of 90.7 to 75.9 in the week ending April 25. It has since fallen to 64.5 in the week ending May 9.
Retail inflation, as measured by the Consumer Price Index (CPI), slowed to 4.3% in April. This is 123 basis points—one basis point is one hundredth of a percentage point—less than its March level. A sharp moderation in food, especially vegetable prices, is the biggest driver of inflation coming down in April. Food inflation, which accounts for 39% of the CPI basket, came down to 2% from 4.9% in March 2020. Vegetable prices shrank by 14.2% in April. Prices of cereals and products contracted by 3%, making it the biggest ever contraction in this category since January 2012, the earliest period for which data is available under the new CPI series.
While a disinflation in cereal prices could be a result of a bumper production, crash in the prices of perishables such as vegetables may reflect a weakening of purchasing power and disruption to supply chains due to lockdown restrictions. The disinflation in cereal and vegetable prices will have an adverse effect on farm incomes and deprive the economy of an important cushion, said Himanshu, an associate professor of economics at Jawaharlal Nehru University. He uses only one name.
To be sure, April has also seen a moderation in core inflation— the non-food non-fuel part of the CPI basket—which has come down from 6.1% to 5.5% between March and April. It needs to be remembered that fuel prices were in stand-by mode in April when state elections were underway. With prices rising once again and breaching new highs on a daily basis, retail inflation could experience additional headwinds in May.