InvestorQ : Do you see that as a positive that the IIP number was back in the positive?
Arti Chavan made post

Do you see that as a positive that the IIP number was back in the positive?

Rutuja Nigam answered.
2 weeks ago

While it is true that IIP turned around to positive territory growing at a positive level of 1%, the momentum of economic revival is still not too visible. IIP was announced by the MOSPI for the month of Dec-20. It must be known that the IIP comes with a lag of one month and is a very important lead indicator of GDP growth. It is also the best barometer of manufacturing.

The positive side of the story is that the IIP has picked up from being in the negative zone into the positive zone. However, that is still not too encouraging. That is because the IIP is still dominated largely by the manufacturing sector to the tune of over 75% and is the best barometer of the industrial recovery. At 1%, the IIP does not give the confidence that the Indian economy can get around to 11% GDP growth in FY22.

The 1% growth in IIP is a good signal to begin with but a much sharper pick up in IIP is required if India has to get to GDP growth of 11% in FY22, which is the estimate put out by the RBI and the other government research agencies.. That has policy implications on fiscal and the monetary front because on both these fronts the options may be running out for the policy makers and they need to see output traction fast.

The lower level of inflation can become a good justification for stable repo rates and an accommodative monetary policy but that has its limits. For example, the monetary policy is limited because repo rates are already at life-time lows. It cannot go much lower from here on. In the last few months, the focus has shifted to boosting GDP through fiscal measures, but even here the government has some constraints.

While fiscal measures have a time lag, the government will need to show traction in IIP numbers, sooner rather than later, to be able to justify its $400 billion stimulus program. What is more is that the government has projected a yawning 9.5% fiscal deficit in FY21. The RBI has underlined the need to boost GDP growth but such assumptions have limits. The IIP needs to see better traction others India’s external ratings will be under pressure.