Base effect and supply-side constraints at play

The Index of Industrial Production rose 3.1% (on-year) in September 2021, the slowest pace in seven months, after surging 12% in August. On a seasonally adjusted basis, the index fell 2.8% (on-month), steeper than the 0.7% drop in August. But compared with the pre-pandemic level, or September 2019, it is up ~4%.

Industrial activity decelerated in September mainly because of three factors; waning low-base effect of last year; global shipping constraints dragging merchandise exports; and, semi-conductor shortage curbing production across sectors. Overall, the slowdown in September was led by the mining and electricity sectors, where the base effect had a larger bearing. Even on a sequential basis, the manufacturing sector was impacted less, but certain segments within bore the burden of supply hiccups. Since much of this is a consequence of an unexpectedly robust bounce-back in demand globally, these supply-side issues are expected to be tackled sooner than later. Meanwhile, Covid-19-related issues continue to weigh on the global and Indian economic outlooks, but increasing vaccination rates and a gradual broad-basing of business activity increases optimism about the upcoming quarters.