India’s IIP growth rose marginally in Mar-22 to 1.9%YoY from 1.5% in Feb-22 (revised lower by 20 bps) to fare slightly better than market consensus pegged at 1.7%. Over the last 5 months, annualised IIP growth has remained in a slow albeit steady range of 1.0-1.9% averaging at a subdued 1.4%. It is possibly due to a combination of an unfavourable base as well as Omicron wave adversely impacting growth momentum in Jan-22. Looking specifically at Mar-22, notwithstanding the subdued headline growth, sequentially IIP posted a strong expansion of 12.5%MoM.

A deep dive into internals

• Mar-22 print marks the first upside surprise vis-à-vis market expectations (see chart) in nearly 5-months
• Mirroring the strong sequential momentum in headline growth, at a granular level, of the 23 manufacturing sub-sectors of IIP 22 registered a sequential expansion while only 1 saw a sequential contraction (i.e., manufactured furniture).
• Within manufacturing, the top 3 industries showing highest sequential growth were - Computer, Electronic & Optical Products (33.1%MoM), Machinery Equipment (21.8%MoM), and Wearing Apparel (21.7%MoM). On the other hand, the bottom 3 industries were Furniture (-0.1%MoM), Electrical Equipment (0.9%MoM), and Textiles (2.7%MoM).
• At sectoral level, while the momentum was broad based, it was led by Utilities and Mining sector, with Manufacturing faring marginally better vis-à-vis seasonal trend.
• On the use-based side, despite the stronger than seasonal sequential momentum on consumer durables and non-durables, annualised growth for both categories remained in contraction for the 6th and 2nd consecutive month respectively.
• Digging deeper, at an Item level, sequential momentum in consumer non-durables is found to be led by FMCG products such as medicated shampoos, hair oil, coconut oil, creams along with beer, juices, bottled water and aerated drinks (aided by onset of summer season).

Outlook

Notwithstanding the strong sequential improvement seen in Mar-22, trend growth in IIP has remained subdued over the last few months. Heading into FY23, the pace of recovery could come under threat given the growing headwinds from the likely impact of Russia-Ukraine crisis and slowing global growth. Further, growth is likely to reel under an adverse statistical base with FY22 IIP growth having averaged at a strong 11.4% compared to a contraction of 8.5% in FY21.

• Russia-Ukraine war has led to a sharp rally in commodity prices and inputs costs for the industrial sector. This is likely to dent producer margins as pass-through to consumers is likely to remain inelastic amidst downside risks to growth. The geopolitical crisis is also likely to prolong supply bottlenecks and act as an added dampener for the sector.
• The sharp updraft in CPI inflation over Mar and Apr-22 has triggered a faster than envisaged monetary policy normalisation by the RBI. Earlier this month, RBI in an off-cycle meeting hiked the repo rate by 40 bps to 4.40%. Here on, we can expect incremental rate hikes up to 75 bps in FY23. The rate adjustments are likely to get front loaded, with a 30 bps hike in Jun-22, keeping in mind the elevated inflation risks in the near-term and the fast evolving global monetary policy cycle
• The run-up in global commodity prices accompanied by tightening of financial conditions, along with continuing Covid related uncertainties and slowdown induced in China, is likely to weigh on global economic activity. IMF expects global GDP growth to slow down by 80 bps to 3.6% in 2022 vs. its Jan-22 estimate, with a sharper deceleration of 100 bps on world trade volumes to 5.0%. This is likely to weigh on domestic export-oriented industries.
• Amidst these evolving dynamics and as the economy emerges out of the pandemic with vaccinations gaining critical mass, services sector is likely to play a dominant role in FY23 GDP growth vis-à-vis manufacturing sector.

Overall, the capex focused government spending, expectation of a normal Southwest monsoon, opening up of the economy post the Omicron wave esp. services are likely to provide support to FY23 growth. We retain our FY23 GDP growth estimate at 7.5% with downside risk.

Annexure-1

Chart 1: Mar-22 IIP surprised above market consensus* for the first time in 5 months

*Source: Refinitiv