14 Apr 2023
India’s IIP rose mildly to 5.6% YoY in Feb-23 from 5.5% YoY (revised up from 5.2% reported earlier) in Jan-23. The headline print beat market consensus, pegged at 5.1%.
A granular look:
While a favourable base effect pushed annualised IIP growth higher in Feb-23, the sequential contraction reflects a combination of lower number of working days in the month, lingering weakness in manufacturing exports and subdued recovery in the pace of private capex. In addition, global growth is set to slow by a somewhat higher degree, as indicated by the IMF in its latest update to the World Economic Outlook report, which has pared its world GDP growth forecast for 2023 and 2024 by 10 bps each to 2.8% and 3.4% respectively. IMF has also revised the growth forecast for India to 5.9% for FY24.
The continued contraction in consumer durables production also underscores the waning of pent-up demand and moderating urban consumption, perhaps feeling the pinch of higher interest rates. The weakness in industrial activity, on a sequential basis, in Feb-23 was also visible from the uninspiring performance of high frequency lead indicators like PMI, Core output and E-Way Bills.
Having said so, we expect continued support from central government’s consistent focus on pushing capex and recovery in rural demand, as seen in improvements in tractor sales accompanied by moderation in rural CPI to a 15-month low of 5.51% YoY in Mar-23. However, the possibility of El Nino conditions likely evolving during the later summer months needs to be continually monitored. In addition, the recent rally in crude oil prices following the surprise announcement of a cut in product by OPEC+ if were to sustain or see further upside, could dent growth. Taking these factors into account, we maintain our GDP growth forecast of 6.0% in FY24.
Says Suman Chowdhury, Chief Analytical Officer “There has been a sequential drop in industrial output in Feb-23 across all categories largely due to the shorter duration of the month. On a YoY basis, the mining sector has seen some underperformance possibly due to the sharp drop in iron ore exports to China in the previous fiscal. While the growth in the manufacturing sector has been steady at 5.3% YoY despite the global headwinds, the power sector has consistently seen a high single digit growth through the year (8.2% YoY in Feb-23). For the eleven months of FY23, the overall IIP has grown by 5.5% with the power sector at 10.0% YoY. Higher levels of electrification, higher power demand from the residential segment and better availability of thermal grade coal have been driving the growth in power output over the last one year. The industries within the manufacturing sector that are yet to witness a meaningful recovery after the pandemic include textile, apparels, leather goods, electronic products and electrical equipment, most of which have been adversely affected by the slowdown in exports. One of the encouraging trends in the IIP has been the gradual rise in the output in the capital goods sector which has grown by 13.4% in the Apr-Feb’23 period. On the other hand, production of both consumer durables and non-durables that grew by 1.5% and 0.8% respectively, still continue to reflect the fragility in rural demand albeit an improving trend is observed. Given the resilience of domestic demand partly offset by the weakness in global demand, we however, expect IIP to average a growth of 4%-5% in FY24.”
Table 1: IIP growth at a glance
Chart 1: Barring consumer durables & Intermediate goods, all other sectors are above their respective pre pandemic levels