India’s industrial activity as measured by IIP decelerated to a 3-month low of 3.7% in Jun-23 from 5.3% in May-23 (revised up from 5.2% earlier). The headline came in below market consensus of close to 5.0%.

A granular look:

• On a sequential basis, IIP index contracted by 1.2%MoM in Jun-23, albeit lower than the average contraction (pre-Covid years) of 2.7% typically seen in the month of June historically due to a seasonal impact of monsoon particularly on mining and power demand.
• On annualised basis, among the sectors, however, both mining and electricity saw growth improve in Jun-23 vis-à-vis May-23. Growth in mining soared to a 5-month high of 7.6%YoY aided by the delayed start and a tardy progress of Southwest monsoon in Jun-23. Growth in electricity output rose to a 4-month high of 4.2%, led by thermal as a source.
• In contrast, growth in index heavy-weight manufacturing eased to a 3-month low of 3.1% in Jun-23 from 5.8% in May-23, on the back of a sequential contraction of 1.0%MoM.
• At a granular level, within the manufacturing sector, the top 3 industries showing expansion in sequential activity were Tobacco products (+12.7%MoM), Other transport equipment (+7.2%MoM) and wearing apparel (+6.7%MoM). The bottom 3 industries were Food products (-8.4%MoM), Rubber and plastics (-5.7%MoM) and Coke and refined products (-3.3%MoM)
• In terms of breadth, manufacturing activity was fairly balanced with 11 sectors registering a sequential expansion and the same number registering a sequential contraction in Jun-23.
• On use-based classification, annualized performance was mixed. While primary and intermediate goods registered marginal improvement in growth, and Infra & construction sector growth was stable, Capital and consumer goods saw a strong deceleration compared to May-23.
• Growth on consumer durables output slipped into contraction once again (-6.9%YoY), after briefly turning positive in May-23. The sectoral growth has remained negative in 6 of the last 7 months led by items such as computers, ready-made garments, furniture and cut & polished diamonds.
• Capital goods growth too slipped to an 8-month low, predominantly owing to an unfavourable base even as the sector continued to expand by a healthy 4.0% on a sequential basis.

Outlook

Jun-23 IIP growth was below market estimates but in line with the moderation seen in a few leading indicators compared to previous month such as auto production, E-way bills, industrial fuel consumption and exports. On a quarterly basis, IIP clocked 4.5% YoY expansion in Q1 FY24, unchanged vis-a-vis Q4 FY23 levels but lower than 13.0% a year ago. But recall that Q1 number over 2021 and 2023 were impacted by the pandemic onset in Q1 in 2020, the impact of which has now got fully normalised.

The support to economic activity from Government capex is validated by healthy traction in Infra & Construction sector, which expanded by 12.5% in Q1 FY24. In addition, strength in urban consumption especially services, nascent signs of private sector capex recovery in auto and some infra oriented sectors are likely to continue to support industrial activity, apart from the recent comfort on commodity prices. Within GDP, the industry component of GVA is likely to show acceleration in Q1 FY24 from 6.3% YoY growth in Q4 FY23 on account of a steep fall in WPI inflation to -2.8% YoY in Q1 FY24 from +3.4% YoY in Q4 FY23.  

Having said so, 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). In addition, impact tightening of domestic monetary conditions and El Nino related uncertainty are expected to incrementally weigh upon domestic growth momentum.

As such, we maintain our GDP growth forecast of 6.0% in FY24.

Says Suman Chowdhury, Chief Economist and Head- Research “IIP growth print in June-23 has disappointed at 3.7% YoY. Clearly, the manufacturing sector has not been able to sustain the growth trend that had been seen in the first two months of the last quarter. The manufacturing output grew only by 3.1% YoY and actually saw a sequential contraction by almost 1.0%. While mining and power have seen better annualized growth rates compared to Apr-May, their weightage in the overall IIP is only 22%. Nevertheless, on a quarterly basis, the IIP growth in Q1FY24 is 4.5% which is 1% higher than the average of the first quarter IIP growth in the last ten years excluding the last 3 yrs which had some anomaly due to Covid.

In terms of use based categorization, the strong output growth of 11.3% YoY in infrastructure and construction goods is a reinforcement of the continuing momentum in public capital expenditure. Consumer non-durables output growth slowed to 1.2% YoY, while durables continued to see a bigger challenge with a contraction of 6.9% in output.” 

Annexure-1

Table 1: IIP growth at a glance

Chart 1: Investment sectors lead IIP recovery, even as consumption continues to lag