India’s industrial activity moderated to a 5-month low of 1.1% YoY in Mar-23, well below market consensus (Refinitiv consensus: 3.3%), from 5.8% (revised up from 5.6% reported earlier) in Feb-23.

A granular look:

• IIP clocked a sequential growth of 8.3%MoM in Mar-23 in line with fiscal year end seasonality. However, the sequential momentum was lower in comparison to past trends seen for the month of March, implying a contraction of 1.6% MoM on a seasonally adjusted basis.

• As per sectoral classification, the moderation in headline growth was an outcome of a moderation in 2 of 3 sub-sectors. Electricity production dropped to a 31-month low of -1.6% YoY in Mar-23 from 8.2% in Feb-23, while manufacturing activity moderated to a 5-month low of 0.5% YoY in Mar-23 from 5.6% YoY.

• Within the 23 sub-sectors of manufacturing, 12 registered a sequential contraction while 11 saw a sequential expansion in Mar-23, on a seasonally adjusted basis. The top 3 industries showing expansion in terms of sequential activity, on a seasonally adjusted basis, were Other Manufacturing (7.4% MoM SA), Transport Equipment (6.2% MoM SA), and Furniture (5.1% MoM SA). The bottom 3 industries in terms of sequential activity, on a seasonally adjusted basis, were Computer, Electronic and Optical Products (-11.8% MoM SA), Pharmaceutical products (-11.2% MoM SA), and Wearing Apparel (-7.0% MoM SA).

• On use-based classification, Mar-23 registered a sharp contraction on an annualized basis in 2 of 6 sub-sectors. The contraction was led by Consumer Durables Goods which contracted for the fourth consecutive month by 8.4%YoY in Mar-23. The contraction underscores the rise in borrowing costs along with waning of some pent-up demand weighing on demand for Consumer durables. In fact, credit off-take by SCB’s (Scheduled Commercial Banks) to Consumer durables (i.e., within personal loans) has seen some moderation in the recent months.

• Annualised growth in consumer non-durables too retreated into negative territory after a gap of 4-months, registering a contraction of 3.1%YoY in Mar-23. More importantly, on a sequential basis and after adjusting for seasonality, production of consumer non-durables dropped by 7.78% MoM in Mar-23 – the slowest pace in close to 3 years; underscoring the fragility in rural demand.

• In annualised terms, industrial activity improved to 4.0% in Q4 FY23 from 2.8% in Q3 FY23. For FY23, IIP growth eased to 5.1%, from 11.4% in FY22 (which had the base advantage) but remained higher the pre-covid average of 3.8%.

Outlook

The moderation in annualised Mar-23 IIP growth is reinforced by the broad-based sequential slowdown in industrial activity seen on a seasonally adjusted basis (as year-end pick-up in activity registered a positive sequential momentum). Deceleration in India’s industrial activity was driven by lingering weakness in manufacturing exports, moderating global growth impulses due to monetary tightening by key central banks, uneven recovery in domestic private consumption, continuing geopolitical uncertainty and the waning impact of pandemic era stimulus of the central government. Some of these factors could continue to weigh on domestic growth in the near future. Global growth is set to slow by a higher degree, as indicated by the IMF in its latest update to the World Economic Outlook report, which pared world GDP growth forecast for 2023 and 2024 by 10 bps each to 2.8% and 3.0% respectively. 

Having said so, we expect continued support from central government’s consistent focus on driving capital expenditure including through PLI schemes and expected recovery in rural demand, as seen through recent improvement in tractor sales accompanied by a pickup in agricultural wages, normalisation of demand for jobs under MGNREGS along with moderation in CPI inflation. However, the possibility of El Nino conditions likely evolving during the later summer months needs to be continually monitored. 

Taking these factors into account, we maintain our GDP growth forecast of 6.0% in FY24.

Summarises Suman Chowdhury, Chief Economist and Head- Research, Acuité Ratings & Research “IIP growth print in Mar-23 has been disappointing at 1.1% YoY, well below the market estimates that were closer to 3.0%. While the figure was set to moderate significantly from the 5.6% in Feb-23 given the usual year-end base factor in March, the figure released do raise concerns on the growth estimates for FY23 which has been pegged at 7.0% as per the second advance estimates of NSO.\

Given the less intense heat conditions and rains in certain parts of the country in Mar-23 as compared to the heat wave seen in Mar-22, the power generation has remained almost stagnant on an annual basis. However, the manufacturing sector also displayed a weakness, growing only by 0.5% over Mar-22. This can be attributed to the lack of momentum in exports and the lack of broad based momentum in current domestic demand along with the typical moderation in activity in some sectors in the first few months of the new fiscal.

The use based classification brings out the weaknesses in the manufacturing sector. Consumer goods output which has a share of 28.2% in the index actually contracted by 5.3% YoY in Mar-23 with durables contracting more than the non-durables. For the whole of FY23, consumer goods production grew only by 0.5%, reinforcing the fact that rural demand is yet to see a consistent revival. What is encouraging is the growth in capital goods production by 8.1% in Mar-23 and 12.7% for FY23, raising hopes on the investment outlook for the current year.” 

Annexure-1

Table 1: IIP growth at a glance

Chart 1: IIP YoY (%) Growth: Mar’22-Mar’23 

Chart 2: All sectors are above their respective pre pandemic levels