India’s industrial activity as measured by IIP rose by 4.2%YoY in Apr-23, well above market consensus of 1.8%, from 1.7% (revised up from 1.1% reported earlier) in Mar-23.

A granular look:

• IIP clocked a sequential contraction of 7.4%MoM in Apr-23 in line with the seasonality seen at the start of the fiscal year. However, the sequential momentum was higher in comparison to past trends seen for the month of April, implying a growth of 2.7% MoM on a seasonally adjusted [1] basis.
  

• As per sectoral classification, the strong performance in headline growth was led by index heavy-weight manufacturing sector, which expanded by 4.9%YoY in Apr-23 compared to 1.2% in Mar-23. On the other hand, mining recorded a moderation in growth to 5.1% YoY in Apr-23 from 6.8% in the previous month, while electricity remained in contraction for the second consecutive month, de-growing by 1.1%YoY compared to -1.6% in Mar-23.

• The electricity or power generation output have seen a weakness primarily due to a relatively moderate summer in the current year as compared to the previous year which had led to higher demand from the residential segment.

• Within the 23 sub-sectors of manufacturing, 8 registered a sequential contraction while 15 saw a sequential expansion in Apr-23, on a seasonally adjusted basis. The top 3 industries showing expansion in sequential activity, on a seasonally adjusted basis, were Pharmaceutical & Botanical Products (29.7% MoM SA), Electronic & Optical Products (8.0% MoM SA), and Electrical Equipment (4.2% MoM SA). The bottom 3 industries in terms of sequential activity, on a seasonally adjusted basis, were Furniture (-8.6% MoM SA), Tobacco Products (-4.6% MoM SA), and Beverages (-3.3% MoM SA).

• On use-based classification, Apr-23 saw a broad-based recovery on an annualized basis in 5 of 6 sub-sectors. The only exception was production of consumer durables which contracted for the fifth consecutive month by 3.4%YoY in Apr-23. The contraction underscores the rise in borrowing costs along with dilution of some pent-up demand especially for goods.

• In contrast, production in consumer non-durables recorded a stellar 10.7%YoY growth in Apr-23 compared to a contraction of 2.7% in Mar-23. More importantly, on a sequential basis and when adjusted for seasonality, production of consumer non-durables rose to a 5-month high of 11.7%MoM in Apr-23, reinforcing the gradual ongoing recovery in rural demand.

[1] MoM nos are adjusted to account for seasonal effects and data variations

Outlook

At the start of FY24, the stronger than anticipated expansion in Apr-23 IIP reinforces the strength seen in other high frequency indicators, underscoring the momentum in economic activity continuing well into Q1 FY24. The outperformance of some of the lead indicators such as PMI – both manufacturing and services, GST collections, E-way bills etc. is seen in the month of May-23 as well.

The consistent focus of the Government on capex, signs of recovery in rural demand alongside continuing traction in urban demand and a gradual turnaround in capex intentions of the private sector as capacity utilisation continues to climb, have all been in support of an encouraging revival in industrial activity. The softness in global commodity prices is serving as an added proponent.  

Having said so, there are escalating downside risks from external side due to tightening of global financial conditions, and still simmering geopolitical uncertainty. Global growth is set to slow as indicated by the latest Global Economics Prospects report by World Bank published in Jun-23, which pared global GDP growth projection for 2024 by 30 bps to 2.4% from 2.7% projected in Jan-23. This could mean continuing pressure on India’s manufacturing exports, which have remained in contraction on trend basis since Oct-22. In addition, there could be a impact on domestic growth from withdrawal of pandemic era fiscal stimulus, along with possibility of El Nino weighing adversely on Southwest monsoon performance.

Taking these factors into account, we maintain a cautiously optimistic stance with a GDP growth forecast of 6.0% in FY24.

Annexure-1

Table 1: IIP growth at a glance

Chart 1: Apr-23 sees improvement in investment-oriented production and a healthy revival in consumption-oriented sectors