India’s industrial production growth unexpectedly, slipped into contraction of 0.8%YoY in Aug-22, to surprise market consensus expecting a positive growth of 1.7%. This marked the first negative print in close to a year and a half. More so, growth for Jul-22 was revised lower by 20 bps to 2.2%. The deceleration was broad-based with significant drag seen in production of consumption-oriented sectors.

A deep dive into internals

• Headline growth slipped into a contraction on the back of a contraction in sequential momentum in the month. The headline index contracted by 2.3%MoM to overshoot the average decline of 0.4% typically recorded in the month of August.
• At a granular level on the sectoral side, both mining and manufacturing recorded a sequential contraction of 1.5%MoM and 2.9%MoM respectively. While the pick-up in rainfall activity and the seasonality associated in the monsoon months have been a factor, manufacturing too registered a broad-based deceleration in activity.   
• Within the 23 sub-sectors of manufacturing, 15 registered a sequential contraction while 8 registered a sequential expansion. The top 3 industries showing expansion in sequential activity were Furniture (+12.5%), Transport Equipment (+6.4%) and Tobacco Products (+4.4%). The bottom 3 industries in terms of sequential activity were Pharmaceutical Products (-13.0%), Wearing Apparel (-12.5%), and Leather Products (-9.9%), all of which have a significant export market that has been adversely impacted due to the global headwinds.
• In similar vein, on the use-based side the slowdown too was broad-based. With the exception of ‘Infrastructure and construction goods’ (which eked a small sequential expansion of 0.6%MoM), most sub-sectors recorded a contraction in production.
• Consumer non-durables production that contracted by a sizeable 5.8%MoM, pushed the annualized growth deeper into negative of 9.9% vs. 2.8% in Jul-22 – marking two consecutive months of de-growth and the worst outcome since the pandemic outbreak.
• Growth in consumer durables also slipped into negative of 2.5%YoY, after a gap of 5 months. All other sub-sectors managed to expand marginally on an annualized basis, owing to a favorable base.
• The weak figures of consumer goods production don’t augur well for the growth trajectory of Q2FY23; however, one needs to look at the data for the next few months that cover festivities, to understand the overall trend in consumption demand.  

Outlook

The latest IIP print gives some indication of a weaker momentum in domestic growth, amidst the escalation of downside risks to domestic economy owing to global factors. Besides IIP, other high frequency indicators such as exports, GST revenues, core sector too have shown a loss of momentum over Aug-22 and more so in Sep-22.

The loss in case of consumption sectors of both durable and non-durables in Aug-22 ahead of the festive season onset is somewhat perplexing and worrisome. It is akin to last two years of Covid, when pick-up in production for the festive season happened almost simultaneously with the ramp-up in seasonal demand (unlike a ramp-up in advance seen in pre-Covid times). While divergence of consumption in favour of services along with elevated CPI could be possible reasons on the demand side, the still elevated input costs in Q2 FY23, excessive monsoon affecting production and logistics along with a slowdown in export orders possibly explain the overall loss of momentum in Aug-22 IIP.

The festive season led surge in urban demand seen in many sectors as per anecdotal evidence, along with the onset of Kharif harvest, extension of free foodgrain under the PMGKY up to Dec-22 and some price reductions announced for FMCG products augur well for rural demand and overall consumption. Separately, Government capital expenditure, having risen by a strong 46.8%YoY during Apr-Aug FY23 also remains supportive of growth.

Having said so, external support from exports is deteriorating as global demand conditions wane. Merchandise exports in Sep-22 slipped into a contraction of 3.5% after a gap of 18 months. In its latest update to the World Economic Outlook report, the IMF slashed its growth forecast for 2023 World GDP and World Trade by 20 bps and 70 bps to 2.7% and 2.5% - this marks a sharp loss of momentum vis-à-vis IMF’s 2022 growth estimates of 3.2% and 4.3% earlier.

As such, we are flagging downside risks to our FY23 GDP growth estimate of 7.2%. The upcoming GDP data for Q2FY23 and the high frequency data for the next few months will be important for having a better grasp on the growth print for the current fiscal. 

Annexure-1

Chart 1: Contracting output for both consumer durables and non-durables in Aug-22