India’s 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 non-durables.
• 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 Government capex.
• 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. 

Outlook

Jul-23 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.

Domestic 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.  

Looking ahead –

• 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 consumption.
• 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. 

As 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.

Summarises 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 in rainfall. 

It 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 favourable.” 

Table 1: IIP growth at a glance

Chart 1: Cumulative IIP Growth - FYTD