Growth in India’s industrial production moderated to 12.3% YoY in Jun-22 from 19.6% in May-22. While unfavourable statistical base in Jun-22 resulted in easing of the headline growth print, the overall impact of the second wave of Covid in Q1 FY22 helped in IIP maintain its second consecutive double digit growth figure.

On sequential basis, the index grew by 0.1% MoM, better than the pre pandemic historical average expansion of -2.7% seen in the month of June.

A deep dive into internals

• Within the 25 sub-sectors of IIP, 13 registered a sequential expansion while 12 saw a sequential contraction.
• The top 3 manufacturing sub-sectors showing expansion in sequential activity were Computer, Electronic, & Optical Products (+48.0% MoM), Tobacco Products (+28.5% MoM), and Other Manufacturing (+20.9% MoM).
• The slowest growing sub-sectors sequentially were Basic Metals (-6.7% MoM), Beverages (-5.0% MoM), and Food Products (-4.8% MoM).
• On sectoral front, mining and electricity contracted sequentially amidst the seasonal impact coming from the onset of monsoon. Manufacturing sub-sector was the lone accelerator, clocking an expansion of 1.3%MoM.
• The use-based classification offered a mixed picture. Primary, Intermediate and Infra & construction goods saw a sequential contraction in output in Jun-22, while Capital and Consumer goods (both durables and non-durables) encouragingly, registered a strong expansion.
• On annualised basis, all subcategories of IIP registered a deceleration in Jun-22 over the previous month given the dilution in the base advantage, except Consumer Non-durables that stood out by posting a mild improvement.

Outlook

The emerging picture on industrial production appears to be somewhat mixed.

There is comfort to be drawn from 12.7% YoY growth in IIP during Q1 FY23 vs. a subdued growth of 1.8% in Q4 FY22 albeit this is largely based on statistical support. This double-digit headline industrial expansion bodes well for the incoming Q1 GDP data (to be released on Aug 31).

• For the quarter, support to industrial activity emerged from both investments led production (15.0% YoY) as well as consumption led production (10.2% YoY). We also note that consumption led production (buoyed by consumer durables) is now above its pre pandemic levels (in Jun-19).
• Strong improvement in manufacturing capacity utilization to 75.3% in Q4 FY22 (above its long-term average of 73.2%) juxtaposed with the 57.0% YoY growth in central government capex in Q1 Fy23 bodes well for future activity.
• Ongoing moderation in commodity prices may propel demand and output in the near term.

On the other hand, there remains areas of concern:

• Notwithstanding the mild improvement, consumer non-durables have not been able to gather enough steam – its overall growth in Q1 FY23 stood at an anaemic level of 1.1% YoY. This underscores the weakness in rural demand amidst elevated rural CPI inflation and sizeable run-up in agri-input costs and an uneven distribution of rainfall in some parts of the country. Having said that, we expect rural demand to strengthen gradually over the next 1-2 quarters.
• The support from external demand (exports) has also started to wane on account of accelerated pace of monetary tightening by key central banks, persistence of elevated geopolitical uncertainty, and lingering of Covid risks in few countries. The IMF in its Jul-22 update of the World Economic Outlook report slashed its 2022 and 2023 global growth forecasts by 40 bps and 70 bps to 3.2% and 2.9% respectively.

Assuming risks to be broadly balanced at this stage, we retain our FY23 GDP growth forecast at 7.5%.

Annexure-1

Chart 1: All IIP subcategories are now above their respective pre pandemic levels

Chart 2: Improving capacity utilization levels bode well for manufacturing activity