Growth in India’s industrial production accelerated sharply to a 12-month high of 19.6% YoY in May-22 from 6.7% (revised lower from 7.1%) in Apr-22. Annualised growth was supported by a favourable statistical base from May-21 that saw the peak of Delta wave of Covid weigh on industrial activity.

On sequential basis, the index grew by 2.3% MoM, somewhat lower than the pre pandemic historical average expansion of 5.5% seen in the month of May.

A deep dive into internals

• Within the 25 sub-sectors of IIP, 17 registered a sequential expansion while 8 saw a sequential contraction.
• The top 3 manufacturing sub-sectors showing expansion in sequential activity were Other Transport Equipment (+9.3% MoM), Wearing Apparel (+9.2% MoM), and Chemicals (+8.2% MoM).
• The slowest growing sub-sectors sequentially were Computer, Electronics & Optical Products (-31.5%MoM), Wearing Apparel (-30.8%MoM), and Machinery Equipment (-20.3%MoM).
• On annualised basis, growth in manufacturing and utilities output rebounded to a 12-month high of 20.6% and 23.5% in May-22 respectively, while mining output growth showed a relatively lower surge to a 7-month high of 10.9%.
• On use-based side, annualized growth at sub-category level shows divergence: (i) Consumer Durables (+58.5%) and Capital Goods (+54.0%) showed robust performance, (ii) Infrastructure & Construction Goods (+18.2%), Intermediate Goods (+17.9%) and Primary Goods (+17.7%) posted strong performance, and (iii) Consumer Non-durables (+0.9%) managed a subdued growth in output. However, as mentioned earlier, the YoY print is not adequately representative of the growth trajectory due to the second wave lockdown in the previous year.

Outlook

The sharp spurt in industrial production growth was along expected lines and is in sync with most other leading indicators of domestic activity, viz., Core Infrastructure Index, PMI, GST collections, automobile production, fuel consumption, etc. The strong annualized performance in IIP could persist in Jun-22, albeit to a lesser degree, with impact of the favourable statistical base on the wane. Nevertheless, it bodes well for Q1 FY23 GDP growth, which is expected to clock a deep double-digit print.

However, the strong annualized surge will start getting normalized thereafter as Covid related disruption to statistical base wanes. In addition, headwinds on account of persistently elevated inflation, anticipated slowdown in global demand (due to aggressive monetary tightening by key central banks, heightened geopolitical uncertainty, lingering of Covid resurgence risk and global financial market volatility) could pose downside risks.

We note that while headline IIP is 1.7% higher (a subdued growth per se) than its pre pandemic levels in May-19, domestic demand, as reflected in production of consumer durables and non-durables stood 15.2% and 8.7% below their respective pre pandemic levels in May-19. In addition, capital goods were 8.3% lower than its pre pandemic level of May-19.

Notwithstanding this unevenness, the economic recovery fortunately has allies in the form of revival in south-west monsoon activity (cumulative rainfall between Jun 1 and Jul 12 stood at 9% surplus vis-à-vis the long period average), capex focused Union Budget (capex disbursal by the central government grew by 70.1% YoY over Apr-May FY23 compared to 14.0% growth in the corresponding period in FY22), and steady improvement in vaccination cover (with 67% of the population covered by two doses) that supports pent-up demand. Overall, we continue to expect FY23 GDP growth at 7.5% albeit with some downside risk amid significant market volatility.

Annexure-1

Chart 1: Consumption oriented production is yet to regain its pre pandemic level

Table 1: IIP growth at a glance