12 June 2020

E

CO

S

COPE

The Economy Observer

Blanket decline in industrial production in Apr’20; food inflation eases in May’20

Monetary policy focused on growth rather than inflation outlook

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







Similar to last month, CSO’s price collection exercise for most items in the CPI basket could not be completed. Thus,

based limited data (63% of CPI), headline inflation stood at 7.2% YoY in May’20, lower than 8.4% a month ago, but still

higher than 6.2% in Feb’20. The actual headline inflation (for 100% basket), however would be lower because a large

part of core inflation is not reported, which is certain to have lower inflation.

As supply chain disruptions eased a tad due to marginal opening up of economic activity in May’20, retail food inflation

(excluding ‘prepared meals, snacks, sweets, etc.’) was seen moderating to 9.3% YoY v/s 12.1% last month.

Every item within the food basket showcased moderate inflation, except for ‘oil and fats’. Interestingly, ‘vegetables’

registered single-digit inflation of 5.3% YoY in May’20 after 8 months of high double-digit inflation.

Separately, worse than the market consensus of 45.0% decline but better than our forecast of 60.8% contraction, IIP

plunged 55.5% YoY in Apr’20. A decline in Apr’20 industrial activity was almost a given following the nationwide

lockdown initiated in Mar’20, which led to near blanking out of economic activity.

Interestingly, manufacturing activity plummeted 64.3% YoY in Apr’20, in line with our expectations; however, decline in

mining activity was lower than expected at 27.4% YoY during the month. According to used-based categories, capital

and consumer durable goods production and infrastructure activity declined in the range of 85-95%. Consumer non-

durables production, however, was down only 36.1% YoY during the month.

Overall, we expect headline inflation to keep easing in the coming months. Moreover, if vegetable inflation continues

to moderate as sharply, headline inflation may even veer toward 2.5% by Dec’20. At this point in time, however, the RBI

seems to be more focused on growth rather than the inflation outlook. As for IIP, we continue to expect contraction for

another 5-6 months, with May’20 contracting another ~30-40%.

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I. May

’20 food inflation moderates to 9.3% YoY from 12.1% a month ago



Price collection exercise for the Consumer Price Index (CPI) remained hampered

in May’20. As a result, price points for major groups including ‘clothing and

footwear’, ‘housing’ for rural areas and ‘miscellaneous’ items were unavailable

in May’20.



As supply chain disruptions eased a tad in May’20 due to marginal opening up of

economic activity during the month, retail food inflation (excluding ‘prepared

meals, snacks, sweets etc.’) was seen moderating to 9.3% YoY v/s 12.1% last

month (Exhibit

1).



Every item within the food basket posted moderate inflation, except ‘oil and

fats’. While inflation in ‘cereals and products’ moderated 7.5% YoY in May’20

v/s 7.8% a month ago, that in ‘milk and milk products’ slowed down to 8.9% YoY

v/s 9.4% in Apr’20. Interestingly, ‘vegetables’ registered single-digit inflation of

5.3% YoY in May’20 after 8 months of high double-digit inflation (Exhibit

2).



Based on limited data made available by the CSO (63% of CPI), headline inflation

stood at 7.2% YoY in May’20, lower than 8.4% a month ago, but still higher than

6.2% in Feb’20.



The actual headline inflation (for 100% basket), however would be lower

because a large part of core inflation is not reported, which is certain to have

lower inflation.

Nikhil Gupta – Research Analyst

(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555

Yaswi Agarwal

– Research Analyst

(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Exhibit 1:

Food inflation moderated in May’20…

Food Inflation, % YoY

9.3

Exhibit 2:

…due to lower inflation in major food items

Cereals

80.0

60.0

40.0

20.0

0.0

-20.0

-40.0

Pulses

Vegetables

(% YoY)

21.1

7.4

5.3

Excluding ‘Prepared Meals, snacks, sweets etc.’

Source: Central Statistics Office (CSO), MOFSL

II. Industrial output growth declines 55.5% in Apr’20



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IIP contracts massively…:

Better than our expectation of 60.8% decline but

much worse than market consensus of 45.0% decline, industrial output in Apr’20

contracted 55.5% YoY v/s 16.7% YoY decline witnessed (revised from decline of

16.6%) in Mar’20 and growth of 3.2% seen a year ago

(Exhibit 3).

...driven by broad-based decline:

A decline in Apr’20’s industrial activity was

almost a given following the nation-wide lockdown initiated in Mar’20, which

led to complete blanking out of economic activity. While manufacturing activity

declined 64.3% YoY, power generation contracted 22.6% YoY in Apr’20. Mining

activity too declined 27.4% YoY during the month

(Exhibit 4).

While each of the

15 sub-industries, which account for 58% weight in the manufacturing index

declined during the month, heavy weights such as basic metals, non-metallic

minerals, rubber and plastics, and chemicals and pharmaceuticals contracted

upwards of 50% in Apr’20.

Infrastructure/construction activity and capital goods production declined 85-

95%:

While infrastructure/construction activity declined at the highest pace

(since the new series began in 2011-12) of 83.9% YoY, capital goods production

declined faster by 92.0% YoY in Apr’20. Production of even primary and

intermediate goods, which held up overall IIP in the first two months of the

current calendar year, contracted. Consumer goods production plunged by

61.9% YoY in Apr’20 due to decline in production of both durable/non-durable

goods

(Exhibit 5).

1QFY21 real GDP growth might contract 15-20%:

As detailed in our monthly

EAI-GVA/GDP

report, Apr’20 witnessed the start of economic activity decline led

by the COVID-19 pandemic. We expect this contraction to continue for another

5-6 months. In May’20, we expect IIP to contract ~30-40%.

12 June 2020

2

Exhibit 3:

IIP growth collapsed in Apr’20…

20.0

10.0

0.0

-10.0

-20.0

-30.0

-40.0

-50.0

-55.5

-60.0

Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20

(% YoY)

Exhibit 4:

…due to blanket decline

Mining

Manufacturing

Electricity

IIP

IIP growth

Apr/19

Jun/19

Aug/19

Oct/19

Dec/19

Feb/20

Apr/20

Source: Central Statistics Office (CSO), MOFSL

Exhibit 5:

All used-based categories exhibited sharp declines

Primary

Consumer

25

10

-5

-20

-35

-50

-65

-80

-95

-110

Apr/19 Jun/19 Aug/19 Oct/19 Dec/19 Feb/20 Apr/20

Capital

Infra/cons

Intermediate

Exhibit 6:

Manufacturing activity slower than last year

< last year

<0%

< 5%

100

80

60

40

20

0

(%)

Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20

Source: Central Statistics Office (CSO), MOFSL

Exhibit 7:

IIP and key components (% YoY)

% Y-o-Y

Mining

Manufacturing

Electricity

IIP

Basic Goods

Capital Goods

Intermediate Goods

Infrastructure/Construction

Consumer Goods

Durable Goods

Non-Durable Goods

IIP excl Food Products

IIP excl Capital Goods

Weight

14.4

77.6

8.0

100.0

34.0

8.2

17.2

12.3

28.2

12.8

15.3

94.7

91.8

FY18

2.3

4.7

5.3

4.4

3.7

4.0

2.3

5.6

6.2

0.8

10.5

4.2

4.5

FY19

2.8

3.8

5.2

3.8

3.5

2.7

0.9

7.3

4.6

5.5

4.0

3.4

3.9

FY20

Apr-19

Feb-20

Industry-based classification

1.7

5.1

9.7

(1.3)

2.5

3.1

1.1

6.0

11.5

(0.7)

3.2

4.6

Use-based classification

0.8

5.1

8.3

(13.7)

(1.4)

(9.5)

8.8

3.0

19.4

(4.0)

(0.7)

(0.1)

(3.3)

4.0

(1.4)

(8.4)

2.2

(5.8)

0.6

5.4

1.5

Other classifications

2.0

2.8

5.0

0.0

3.5

5.7

Mar-20

0.0

(20.6)

(6.8)

(16.7)

(3.1)

(35.6)

(18.5)

(23.8)

(23.2)

(33.1)

(16.2)

Apr-20

(27.4)

(64.3)

(22.6)

(55.5)

(26.6)

(92.0)

(66.0)

(83.9)

(61.9)

(95.7)

(36.1)

(17.0)

(57.3)

(15.2)

(53.0)

Source: CSO, MOFSL

12 June 2020

3

NOTES

12 June 2020

4

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