India’s IIP growth rose marginally in Jan-22 to 1.3%YoY vs. an upwardly revised 0.7% (prior 0.4%) in Dec-21. This was largely in line with the median market consensus of 1.5%. In addition, on a positive note, sequentially the index remained unchanged vs. Dec-21 despite the month capturing nearly the full impact of the Omicron wave. This validates our view of Covid related restrictions being less severe on industry and export-oriented sectors amidst the third wave.

• Among the internals, on a sectoral basis, mining and electricity recorded a marginal expansion in production – on both sequential and annualized basis (see Table1 below).
• In contrast, manufacturing sector registered a sequential contraction of 0.9% in the month, with annualized growth in positive at 1.1% - the best performance in last three months, owing to a favorable base.
• At a granular level, the breadth of manufacturing recovery however deteriorated. Of the 23 sub-industries, just 8 registered a sequential expansion (vs. all sub-industries in Dec-21), and 15 registered a sequential contraction (see Chart1)
• Top 3 manufacturing sub-sectors that expanded sequentially in Jan-22 were - Transport Equipment, Non-Metallic Minerals, and Wearing Apparel. The bottom 3 industries recording a contraction in sequential momentum were Electrical Equipment, Furniture, and Leather.
• On the use-based side, capital and consumer goods, recorded an incremental contraction in production in Jan-22, by 0.3% and 3.6% respectively. As such, annualized growth for both capital goods as well consumer durables continued to remain in contraction for the fourth consecutive month.
• Over the last four months, the deceleration in capital goods has been driven by – Harvesters and threshers, Other agricultural machinery, Rice milling machines and Tractor tyres. This underscores the slower recovery in rural economy, possibly pulled down by unseasonal rains and delayed Kharif harvesting among other factors (see Table1).
• Among consumer durables, the contraction has been led by seasonality in items such as air coolers, lower production of items such as electric heaters, blankets along with slowdown in two-wheelers and bicycles – yet again reflecting lower rural spends (see Table 1 below).

Outlook

IIP growth at the start of 2022 has displayed resilience to the Omicron impact, with no sequential setback to output and annualised growth seeing a marginal improvement. This is somewhat in contrast to other high frequency indicators, which had seen a non-trivial albeit short-lived setback in momentum in Jan-22. The sharp ascent and decline in Omicron cases in a span of a month (beginning late Dec-21 up to Jan-22 end), saw in tandem swift imposition and thereafter withdrawal of restrictions on economic activity. This time however, the restrictions were biased towards contact intensive services, with industrial and export sectors remaining largely outside the ambit.

Omicron concerns have given way to geopolitical worries since late Feb-22. The invasion of Ukraine by Russia, has sent commodity prices soaring (CRB index is up by 16% since end Jan-22) including crude oil prices. The actual impact on macros and in particular growth will remain dependent on longevity and severity of tensions, via impact on the following:

Higher input costs

Input cost pressures have remained elevated over the past one year, with WPI inflation averaging at over 12.5%YoY over Apr-Jan FY22. The run-up in the commodity prices since Jan-22 and sharply in some like crude oil since the start of the Russia-Ukraine conflict, runs the risk of re-acceleration in producer prices which will exert pressure on profit margins and value add.

Trade channel disruption

While Russia and Ukraine both are small trade partners for India, the ongoing conflict can adversely impact some sectors disproportionately such as Project goods, Paper and Printing, Vegetable oils, Defence Equipment, Chemicals etc., along with the possibility of extending ongoing supply disruptions for longer. Further, downside in global growth may adversely impact domestic exports in FY23.

Investment cycle

The recovery in private investment cycle anticipated in H2 FY23 could turn tentative, owing to the potential uncertainty in domestic demand amidst lurking inflationary pressures from fuel price revisions. IIP granular data does already highlight a broader slowdown in rural demand.

Further, downside risks to growth have emerged from possible financial market volatility, as key global central banks normalize monetary policies at a faster pace amidst geopolitics fanning inflation pressures further.

Owing to these factors, we see downside risk to our FY22 and FY23 GDP growth forecast of 9.2% and 7.5%, both respectively.Our base case growth forecast for FY23, rests on infrastructure spending as highlighted in the Union Budget FY23, healthy progress on vaccination along with broadly accommodative monetary and fiscal policies. The geopolitical scenarios and its impact will remain on close watch.

Annexure-1

Table 1: Drivers of contraction in capital and consumer goods growth

Chart 1: Breadth of manufacturing recovery deteriorates in Jan-22

Table 1: IIP growth at a glance