India’s industrial production growth picked up in Apr-22 to an eight-month high of 7.1%YoY compared to 2.2% in Mar-22 (revised up from 1.9%). The annualised growth was supported by a favourable base from Apr-21 that saw the peak of Delta wave of Covid weigh on economic activity.

On a sequential basis, the index contracted by 9.2%MoM in line with seasonal downside typically seen in the month of April, post the fiscal year-end ramp up in industrial activity (in March). Having said so, the contraction in Apr-22 was less than the average contraction of 11.7% usually seen in the month (except Covid year of 2020), thereby aiding the headline outperformance vis-à-vis market expectations (consensus: 5.0%).

A deep dive into internals

• Within the 25 sub-sectors of IIP, 4 registered a sequential expansion while 21 saw a sequential contraction.
• The top 3 manufacturing sub-sectors showing expansion in sequential activity were Beverages (+2.6%MoM), Chemicals (+1.7%MoM), and Printing & Reproduction of Recorded Media (+1.5%MoM).
• The slowest growing sub-sectors sequentially were Computer, Electronics & Optical Products (-31.5%MoM), Wearing Apparel (-30.8%MoM), and Machinery Equipment (-20.3%MoM).
• On annualised basis, index heavy-weight manufacturing output rebounded to 6.3%YoY in Apr-22, while mining and electricity grew by 7.8% and 11.8% respectively.
• On use-based side, annualized growth was supported by all sub-sectors with the exception of Consumer Non-durables which continued to clock a subdued growth of +0.3%YoY (after contracting over months of Feb-Mar-22).
• A favourable base catapulted Consumer durables growth into positive, at 8.5%YoY in Apr-22 after a hiatus of 6 months.
• In similar vein, capital goods growth rose to an 8-month high of 14.7%YoY compared to 2.0% in Feb-22 and Mar-22 both.

Outlook

The resilience in most of lead indicators of economic activity such as PMI, GST collections, core infra output, railway freight and port traffic along with bank credit continue to underpin the recovery in manufacturing activity. Reflecting the improvement in industrial activity, capacity utilisation (CU) in the manufacturing sector, as per RBI’s latest survey too increased further to 74.5% in Q4FY22 from 72.4% in Q3 – to surpass the pre-pandemic levels.

Looking ahead, the pace of IIP recovery could come under threat given the prolonged headwinds from ongoing Russia-Ukraine crisis, elevated commodity prices (i.e., input costs for producers) and slowing global growth. World Bank became the latest international agency to cut 2022 global growth outlook sizeably to 2.9% from 4.1% anticipated in Jan-22 (following downgrades from IMF and OECD).

In addition, the sharp updraft in CPI inflation since Mar-22 has triggered a faster than envisaged monetary policy normalisation by the RBI. After adjusting the repo rate higher by 40 bps in an off-cycle meeting in early Apr-22, RBI hiked the policy rate further by 50 bps in Jun-22. While the repo rate at 4.90% at present remains below the pre-pandemic level of 5.15%, we expect an incremental tightening of 60-75 bps between Aug-22 and Dec-22.

Keeping in mind these risks, we retain our FY23 GDP growth at 7.5% with some downside risk. We believe that Government’s focus on capex, expectation of a normal South-west monsoon driving rural demand improvement, and contact intensive services led recovery with complete opening up of the economy should provide support to growth.

Annexure-1

Chart 1: A favourable base catapulted headline IIP growth to an 8-month high

Table 1: IIP growth at a glance