- India’s industrial activity as measured by IIP rose to a 5-month high of 5.7% in Jul-23, from an upwardly revised 3.8% (3.7% earlier) in Jun-23. The headline growth turned out to be better than market consensus which was pegged at 4.8% (Refinitiv poll).
- On sequential basis, IIP index contracted by 1.0% in Jul-23, to build on the contraction of 1.1% recorded in the previous month. The sequential moderation was marginally higher than average contraction (pre-Covid years) of 0.7% recorded in the month of July historically
- On annualized basis, the improvement in growth was broad-based but partly driven by a favourable base effect.
- On use-based classification, annualized growth in Infrastructure & Construction sub-sector was the strongest, at 11.4%, marking the fourth consecutive expansion in double-digits supported by healthy pace of Government capex.
- Economic activity continues to derive support from the healthy pace of Government capex and moderate traction in consumption, which may however, 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, are likely to cushion the potential downside in consumption.
- Overall, we maintain our GDP growth forecast of 6.0% in FY24.
industrial activity as measured by IIP (Index of industrial production) rose to
a 5-month high of 5.7% in Jul-23, from an upwardly revised 3.8% (3.7% earlier)
in Jun-23. The headline turned out to be better than market consensus which was
pegged at 4.8% (Refinitiv poll).
A granular look:
- On sequential basis, IIP index
contracted by 1.0% in Jul-23, to build on the contraction of 1.1% recorded
in the previous month. The sequential moderation was marginally higher
than average contraction (pre-Covid years) of 0.7% recorded in the month
of July historically, given the seasonal factor.
- On annualised basis, the improvement
in growth was broad-based but partly driven by a favourable base effect.
- Mining output rose by 10.7%YoY, to
mark the fastest pace of annualised expansion in 14 months. This was
despite rainfall activity seeing a strong pick-up in the month of Jul-23,
after a delayed onset and a sluggish progress in the Jun-23. It is
possible that the uneven spread of monsoon which remained subpar in
Eastern part of the country (which has most of the coal mines) – allowed
mining operations to continue unimpaired in the month.
- Electricity production too clocked a
healthy pace of expansion of 8.0%YoY – highest in past 5 months, compared
to 4.2% in Jun-23 as strong progress of monsoon and accompanying humid
weather conditions escalated demand for power, met largely through thermal
power as a source.
- Manufacturing sector growth ticked up
to 4.6%YoY from 3.1% in Jun-23. At a granular level, more than half i.e.,
15 of 23 industries registered an improvement in growth in Jul-23 (vs.
Jun-23) compared to 9 industries a month ago.
- On use-based side annualised
performance was mixed. On a sequential basis, most categories witnessed a
contraction except for consumer goods – i.e., both durables and
- On annualised basis, growth in Infra
& construction sub-sector was the strongest, at 11.4%, marking the
fourth consecutive expansion in double-digits supported by healthy pace of
- Among other sectors, growth improved
vis-à-vis Jun-23 for Primary, Capital and Consumer non-durable goods.
- Consumer durables continued to
contract albeit at a slower pace of -2.7% in Jul-23 compared to -6.2% in
the previous month. Over the last 1 year, consumer durables have
contracted in all but two months underscoring a subdued backdrop for this
category particularly due to weaker demand in rural areas and the impact
of higher interest rates in urban areas.
IIP growth was more exuberant than envisaged, supported by most lead indicators
that displayed either stability or higher growth. For instance, core industries
growth and PMI manufacturing held up well in Jul-23 at 8.0%YoY and 57.8 vs.
8.3% and 57.7 in Jun-23. Higher e-way bills were generated at 8.8 Cr compared
to 8.6 Cr a month ago. However, the sustainability of such a healthy trend in
industrial activity needs to be seen.
economic activity continues to derive support from –
- Healthy pace of Government capital
expenditure, with total investment of centre and states clocking an
expansion of a robust ~50%YoY during Apr-Jul FY24 compared to ~36% over
the same period in FY23. This trend is likely to remain intact in the
coming quarters amidst strong budgetary support from the central
government and extension of interest free loans to states.
- Services driven consumption growth.
In comparison, consumption of goods remains somewhat sluggish as validated
by weakness in production of consumer durables within IIP, a consequence
of declining pent-up demand and higher interest rates.
- Consumption could turn more tepid,
especially of goods, as complete pass-through of past rate hikes weighs 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, are likely to cushion the downside in
- Additionally, the external sector is
unlikely to offer any support amidst expectations of slowdown in
merchandise trade (the WTO projects world merchandise trade volume growth
to decelerate to 1.7% in 2023 from 2.7% in 2022).
- The comfort from lower input costs
enjoyed since Q4-23 could wane somewhat amidst the recent increase in
commodity prices, particularly crude oil.
such, we expect growth in industrial production to decelerate in FY23, from
5.2% recorded in FY23. This would be in line with our FY24 GDP growth forecast
of 6.0% versus 7.2% in FY23.
Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings &
Research “IIP data suggests higher industrial activity in July-23 despite
the seasonal factor. The healthy annualized growth in the manufacturing sector
has been primarily driven by higher production of metals, pharmaceuticals and
automotives. The mining sector has benefitted from the delayed rainfall in some
parts of India, leading to an YoY output growth of 10.7% during the month. Typically,
the electricity sector witnesses a decline in generation during the monsoon
months but given the lack of consistency in the rainfall, the output has been
relatively stable in the current quarter. Power demand and generation is
estimated to have increased further in August due to the nation-wide deficiency
is encouraging to see both annualized and sequential output growth in the
consumer goods sector in July-23 and this is likely to be due to the stocking
requirements before the festive season. However, any sustained growth in
consumer goods will require a consistently favourable demand scenario.
Cumulatively, IIP has grown by 4.8% YoY in the first four months of the fiscal.
We expect IIP to maintain such a trend for FY24 as a whole supported by the
driving force of Govt Capex although the base factor will not remain as
Table 1: IIP growth at a glance
1: Cumulative IIP Growth - FYTD