Growth in India’s industrial production improved to a 4-month high of 5.7% YoY in Feb-24 from 4.1% (revised higher from 3.8% reported earlier) in Jan-24. The headline print for Feb-24 is consistent with the directional move, although it’s mildly below market consensus of ~6.0%.   

A granular look:

• On sequential basis, IIP contracted by 4.1% MoM in Feb-24. This is marginally better than the median monthly contraction of 4.9% seen in the month of February. Among the 25 sub sectors of IIP, 8 registered a sequential expansion while 17 saw a sequential contraction but this is consistent with the shorter duration of the month.  
• Within manufacturing, the top 3 industries showing expansion in annualized activity were Other transport equipment, Furniture, and Fabricated metal products. The bottom 3 industries were Pharma, medicinal chemical & botanical products, Miscellaneous manufacturing products, and Wearing apparel.
• Sectoral classification - on an annualized basis, the expansion in Feb-24 was led by the Mining and Utilities sector. We note that growth in mining production has outpaced IIP ex mining activity for ten consecutive months now on the back of strong momentum seen in case of Coal and Natural Gas.
• Use-based classification - on an annualized basis, growth in Feb-24 was spearheaded by Consumer durables (which recorded a double-digit expansion for second month in a row), followed by a heathy expansion seen in case of Intermediate goods and Infrastructure & construction goods. Noticeably, consumer non-durables contracted for second consecutive month, with Feb-24 print coming at -3.8% YoY, the weakest in last 16-months.

Outlook

The significant uptick in Feb-24 IIP growth is broadly in sync with the signals derived from some of the leading indicators like the Core Infrastructure Index, PMI Manufacturing, GST E-Way Bill generation, and automobile production (as per SIAM). With 2024 being a leap year, most indicators also benefitted from the one extra working day in Feb.

Having said that, the consolidated signal from IIP appears mixed. The post Covid recovery continues to be strongly led by investment-oriented production, with recovery in consumption-oriented production remaining subdued. We note that while the index for Infrastructure & Construction goods is ~24% above its comparable pre Covid level, the index for Consumer non-durables is ~3% below its comparable pre Covid level. This divergence is also reflected in the Real GDP data, where the share of private consumption is estimated by the NSO to have fallen to a 13-year low of 55.6% in FY24, in contrast to the share of gross fixed capital formation, which is estimated at an 11-year high of 34.1% in FY24. 

Going forward, the following trends would determine the trajectory of industrial activity:

• While the pace of disbursal of public capex is expected to remain healthy at ~17% in FY25 (as per the interim budget), it would moderate from the robust levels of ~28% growth in FY24. Hopefully, this could get offset if private investments pick-up post the general elections in Q1 FY25.
• Consumption-oriented activity remains sluggish. However, the recent fuel price cuts (LPG by Rs 100 per cylinder, and petrol and diesel by Rs 2 each per litre) could potentially aid disposable incomes. In addition, the emerging likelihood of normalisation of El Nino conditions by May-24, augurs well for 2024 southwest monsoon, which in turn could help boost cyclical recovery in rural consumption. Nevertheless, headwinds from lagged impact of tight monetary policy and regulatory measures on unsecured lending likely could weigh somewhat on urban consumption. 
• While geopolitical risks persist, recent upgrades to growth outlook offer respite. As per the IMF, World GDP growth is projected to stay unchanged at 3.1% in 2024 (same as 2023), before posting a mild recovery to 3.2% in 2025.

For FY24, we continue to expect ~20 bps upside to NSO’s GDP growth estimate of 7.6%. For FY25, we expect GDP growth to moderate to 6.7%-6.8% with bulk of the moderation likely to be statistical (related to normalization impact of net indirect taxes) along with the reversal of benefit to value add to the industrial sector from deflation in input prices (we expect WPI inflation to increase to 3% in FY25 from an estimated level of -0.7% in FY24).

Says Suman Chowdhury, Chief Economist and Head – Research  

“There has been a significant pickup in IIP growth in Feb-24 to 5.7% as compared to the upwardly revised 4.1% in Jan-24. This has been slightly better than our expectations and largely reflects the momentum in the core industries – largely steel, cement, coal and power. The cumulative growth in industrial output in the eleven month Apr-Feb’24 period remains healthy at 5.9%. With manufacturing output growth improving to 5.0% YoY during the month vs 3.6% in the previous one, the annualized growth for that sector is expected to be around 5.5% for FY24.

While manufacturing has the dominant share in IIP, the solid growth in mining and electricity is also providing the momentum to IIP at 8.0% and 7.5% YoY respectively. In terms of use based categories, infrastructure goods has notched up output growth of 10.0% in the current year (Apr-Feb), driven by the continuing public capital investments. As in the previous months, consumer goods output remains an outlier with 3.5% YoY growth in the Apr-Feb period, highlighting relatively weak consumption demand from the rural areas.  

Overall, FY24 is likely to be a robust year for industrial activity with IIP growth forecast at 5.8% YoY on the back of 5.3% growth in the previous year. This will be the highest growth print for IIP over the last ten years excluding FY22, the year just after the outbreak of Covid. For FY25, we expect industrial growth to moderate to 5.0%-5.5%.”

Table 1: Annualized growth in IIP and its key components

Chart 1: Headline industrial performance in FY24 has been the strongest since FY11 (barring the COVID induced statistical surge in FY22)

Chart 2: Use-based classification of IIP shows a marked divergence between investment and consumption oriented production levels