13 Jun 2022
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
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.
Chart 1: A favourable base catapulted headline IIP growth to an 8-month high
Table 1: IIP growth at a glance