- IIP 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.
- The headline index contracted by 2.3%MoM to overshoot the average decline of 0.4% typically recorded in the month of August.
- The slowdown in growth was broad-based with significant drag seen in production of consumption-oriented sectors and also a deceleration in core industries’ output. Manufacturing recorded a sequential contraction of 2.9% MoM.
- Mining too saw a sequential contraction of 1.5%MoM, possibly owing to a pick-up in rainfall in the month and the consequent operational disruptions.
- Consumer non-durables production de-grew by a sizeable 5.8%MoM, pushing the annualized growth deeper into negative of 9.9%, marking two consecutive months of de-growth and the worst since the pandemic outbreak.
- Growth in consumer durables also slipped into negative territory of 2.5%YoY, after a gap of 5 months.
- The latest IIP print highlights some downside risks to overall economic growth owing to global factors. This increases the likelihood of a lower FY23 GDP growth compared to our forecast of 7.2% but more clarity will emerge with publication of Q2 GDP data and the high frequency data over the next few months.
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
- 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.
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.
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
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
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.
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
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.
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
Chart 1: Contracting
output for both consumer durables and non-durables in Aug-22