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Aug-23 IIP: Catapulted by unseasonal support

13 Oct 2023

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KEY TAKEAWAYS

  • India’s industrial activity as measured by the IIP (Index of industrial production) rose to a 14-month high of 10.3% in Aug-23, from an upwardly revised 6.0% (5.7% earlier) in Jul-23. The headline turned out to be better than market consensus pegged at 9.0% (Refinitiv poll).

  • On sequential basis, IIP index expanded by 1.8% in Aug-23, compared to a contraction of 0.7% in Jul-23. The sequential performance defies the average contraction of 0.4% (in pre-Covid years) that is recorded in August historically.
  • Deficiency in Aug-23 rainfall by over 36% of LPA to mark the worst outcome in over a century, has supported higher unseasonal activity in Mining and Electricity sub-sectors.

  • Improvement in growth was broad-based on annualised basis across all the sub-sectors. On the use-based side, all sub-sectors posted an expansion on sequential basis except for Consumer non-durables. The unanticipated spike in inflation over Jul-Aug-23 led by food prices along with monsoon deficiency, has possibly weighed on rural demand & therefore consumer non-durable production.

  • Economic activity continues to derive support from healthy pace of Government capex and moderately healthy consumption, which may turn tepid as complete pass-through of past rate hikes weigh on urban demand, while El Nino related uncertainty impinges on rural demand. Having said so, the onset of festive season as well as support from fiscal spending ahead of key elections, may cushion the downside in consumption.
  • Overall, we maintain our GDP growth forecast of 6.0% (with some upside risk) in FY24.


India’s industrial activity as measured by the IIP (Index of industrial production) rose to a 14-month high of 10.3% in Aug-23, from an upwardly revised 6.0% (5.7% earlier) in Jul-23. The headline turned out to be better than market consensus pegged at 9.0% (Refinitiv poll).

 

A granular look:

  • On sequential basis, IIP expanded by 1.8% in Aug-23, compared to a contraction of 0.7% in Jul-23. The sequential performance defies the average contraction of 0.4% (in pre-Covid years) recorded in the month of August historically.
  • The deficiency in Aug-23 rainfall by over 36% of LPA to mark the worst outcome in over a century, has ironically supported higher activity in Mining and Electricity sub-sectors.
  • Even manufacturing sector performance fared better than seasonal trends as it expanded by 1.2%MoM, led by robust sequential activity in sub-sectors of Transport Equipment (+18.1%MoM), Fabricated metal products (+11.6%MoM),  and Computer & electronics (11.3%MoM).
  • As such, improvement in growth was broad-based on annualised basis across all the sub-sectors. Growth in mining sector, at 12.3%YoY was the best in 2-years, while that for Manufacturing (9.3%YoY) and Electricity (15.3%YoY) soared to 14-month high.
  • On the use-based side, all sub-sectors posted an expansion on sequential basis except for Consumer non-durables. The unanticipated spike in inflation over Jul-Aug-23 led by food prices along with monsoon deficiency, are likely to have weighed on demand from rural areas & therefore production.
  • On annualised basis –
    • Infrastructure & construction goods continued to outperform posting a healthy expansion of 14.9% - the fifth consecutive month of double-digit growth supported by healthy traction in public capex.
    • Growth in Consumer Goods swung into an expansion of 5.7% in Aug-23 compared to a contraction in previous two months. This can be partly attributed to the strong build-up in inventory of passenger vehicles to close to 60 days, ahead of the festive season.

 

Outlook

Aug-23 IIP growth is yet another validation of growth momentum having continued to remain healthy well into Q2 FY24. Most high frequency indicators capturing industrial activity such as PMI manufacturing, E-way bills, GST collections and fuel consumption have maintained strength in Sep-23 as well.

 

Having said so, the overall industrial landscape continues to provide a somewhat mixed picture.

  • Healthy pace of Government capex, with total capex of centre and states clocking an expansion of a robust ~46%YoY during Apr-Aug FY24 compared to ~31% over the same period in FY23 has supported growth so far. While this trend is likely to remain intact in the coming months amidst strong budgetary support from the central government and extension of interest free loans to states, some pull-back in Q4 cannot be ruled out (given the importance of adherence to fiscal deficit targets).
  • Consumption of goods remains somewhat sluggish as validated by weakness in production of consumer durables within IIP (-1.0% on FYTD basis) – a reflection of the dilution of pent-up demand and higher interest rates. A festive season spurt could lead to some buoyancy in demand in Q3 FY24, along with Government’s fiscal support ahead of upcoming key states and national elections. The recent reduction in LPG cylinder price and likelihood of augmentation of farmer incomes under PM Kisan Nidhi Scheme, as widely reported, can offset adverse impact from uneven distribution of monsoon.
  • Labor-intensive industrial activity remains sluggish, weighed down by export demand in sectors such as textiles, wearing apparels and leather. The external sector is unlikely to offer any support amidst expectations of a slowdown in merchandise trade. In its latest update on Oct-23, the WTO revised lower its forecast for merchandise trade volume growth in 2023 to 0.8% from 1.7% earlier (and 3.0% in 2022).
  • The comfort from lower input costs enjoyed since Q4-23 could wane somewhat amidst the recent increase in commodity prices, led by crude oil.

 

Overall, we expect growth in industrial production to moderate slightly in FY24, from 5.2% recorded in FY23, given the lower benefit of the base factor particularly in the second half of the year. However, IIP prints in FY24 have on average been surprising on the upside, besides seeing minor upward revisions. This may provide an upward bias to our FY24 GDP growth forecast of 6.0%.

 

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “IIP growth in Aug-23 has exceeded expectations by rising to 10.3% YoY vs 6.0% YoY in Jul-23. The growth in the manufacturing sector stood at a 14 month high of 9.3% YoY along with a moderate sequential output growth of 1.2%, better than the seasonal trend of the past. Cumulatively, IIP has grown by a healthy 6.1% YoY in the first five months of the fiscal which reflects a significant momentum in industrial activity.

 

There are three factors behind the strong reported IIP growth figure – one the base advantage with IIP having contracted by -0.7% in Aug-22; second, the benefits that accrued to the mining and the electricity sector due to the highly deficient rainfall in Aug-23; these two segments reported growth of 12.3% and 15.3% YoY respectively. And thirdly, the structural increase pickup in industrial activity such as cement and steel production in H1FY24 due to a significant rise in infrastructure spending and higher expectation of consumer goods demand during the festive season.    

 

We expect IIP to maintain a healthy growth trend for FY24 as a whole although the base factor will not remain as favourable in the second half of the year.”

 

 

Table 1: IIP growth at a glance



Chart 1: IIP Performance: FY 24 YTD