The IIP data for May 2020 confirms our conviction that economic activity hit a trough in April 2020, and will record an uneven recovery in the subsequent months. However, the rising infections and imposition of localized lockdowns in many states, are raising red flags about the pace of normalization that we should expect in the ongoing quarter. Economic activity is likely to tread a bumpy path in the coming months, in our view.
As expected, the pace of recovery in industrial output was mixed across sectors in May 2020, with manufacturing showing the biggest improvement, yet remaining the worst affected sector in the second month of the lockdown.
In terms of the use-based categories, the biggest pickup was displayed by infrastructure/construction goods, the contraction in which halved to 42.0% in May 2020 from 84.7% in April 2020, driven by cement and steel.
Consumer non-durables, which includes many essential items, the demand for which has been largely unscathed during the crisis, emerged as the best performing category in May 2020, with the narrowest contraction of 11.7%.
In our view, pent up demand, especially for items that are now considered to be essential under the new normal of work from home, would lead to a temporary uptick in production and sales of certain categories of small to mid ticket consumer durables in the initial unlock period, which may not sustain subsequently.
Primary goods, which had been relatively less affected by the lockdown, recorded the smallest improvement, with the pace of contraction narrowing only to 20.0% in May 2020 from 26.6% in April 2020.
We expect an uneven recovery to have continued in June 2020, with the overall IIP likely to record a contraction of 15-20% in that month. For instance, the de-growth in merchandise exports is reported to have eased significantly in June 2020, from the levels of 60.3% and 36.5%, respectively, recorded in April 2020 and May 2020. Moreover, the pace of contraction in the consumption of diesel and petrol in June 2020 was narrower than the level in March 2020, which may partly be explained by the switch from public transport to private vehicles. Additionally, the contraction in electricity generation narrowed further to 12.7% in June 2020, although this remained weaker than the 10.4% de-growth recorded in March 2020, when the lockdown was first imposed. In contrast, reflecting the lagged impact of subdued offtake levels, the pace of de-growth in the output of Coal India Limited worsened in June 2020, which is likely to constrain the recovery in mining output in that month.
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