India’s industrial activity as measured by IIP rose by 5.2%YoY in May-23, up from 4.5% (revised up from 4.2% reported earlier) in Apr-23. This is somewhat higher than market expectation of a 4.8% print.

A granular look:

• Sequentially, the IIP grew by 3.2% which, however, is lower than the average sequential uptick seen in the month of May.

• The manufacturing sector has seen a fairly healthy performance with a 5.72% YoY and 2.74% YoY output growth in May. Out of 23 sub-groups in Manufacturing, only 5 witnessed a sequential output contraction in May-23 – food products, paper, printing, pharma and other manufacturing.

• The mining sector has also seen a strong growth – 6.4% YoY and 4.49% MoM in the month, largely driven by steady increase in coal production.

• Electricity generation had the disadvantage of a high base due to a harsher summer and a spurt in residential power demand last year. It had reported an annualised contraction in March and April and in May, it grew by only 0.85% YoY. However, on a MoM basis, the generation has grown by 4.84%.

• On use-based classification, there has been a broad based growth across all segments on an annualised basis. However, a weakness continues to persist in the consumer goods segment – the durables portion has grown by 1.14% YoY as compared to 7.64% for non-durables. On a sequential basis, durables saw a contraction of 3.83%.

Outlook

We note that the non-seasonally adjusted FYTD (May vs Mar) momentum stands at -4.2% in the current year. This is not just stronger than the pre Covid average of -6.6% seen in the first two months of the financial year, but it has also turned out to be the strongest FYTD performance seen in the current IIP data series. This highlights resilience of the Indian economy despite gradual build-up of an adverse global backdrop.well.

• Government’s persistent push for reviving the investment climate (via prioritization of delivery of public capex) has been one of the key support factors for sectors like Capital Goods and Infrastructure & Construction Goods.

o  We note that central government capex posted a healthy expansion of 56.7% YoY during Apr-May FY24, over and above a robust increase of 70.1% during the corresponding period in FY23.

• While the consumption counterpart within IIP does not share the same degree of optimism, the sluggishness seen in Q4 FY23 is fading, with early signs of recovery in consumer goods.

While that’s comforting, FY24 would also face the anticipated slowdown in global demand (India’s exports have started manifesting this trend), which could get pronounced in the second half of the year. In addition, lagged impact of past monetary tightening by the RBI would also start to weigh along with still alive El Nino risk (which could potentially dampen crop production, and thereby rural demand). Overall, we expect a mild moderation in IIP performance in FY24 compared to the 5.2% expansion seen in FY23. However, the sharp decline in input price inflation in the near past coupled with the upside surprise in IIP data for two consecutive months would buoy Industry GVA. Hence, while we maintain our FY24 GDP growth estimate of 6.0%, we continue to ascribe the possibility of an upside of 20-30 bps.

Says Suman Chowdhury, Chief Economist and Head- Research “IIP growth print in May-23 has been encouraging at 5.2% YoY, higher than the market estimates that were closer to 4.5%. This has been primarily driven by a healthy growth in the manufacturing sector. What has continued to offset the IIP growth to some extent is the marginal growth in electricity output. The latter is largely on account of a milder summer in the current year as compared to that of the previous year which has led to lower residential demand.   

In terms of use based categorization, what is worthy of note is the growth in capital goods production by 8.2% in May-23, raising hopes on the investment outlook for the current year. The strong output growth of 14.0% YoY in infrastructure and construction goods is a reinforcement of the continuing momentum in public capital expenditure. Consumer non-durables output rose by 7.6% YoY, highlighting a moderate recovery in rural demand. However, durables continue to see a challenge with only 1.1% YoY growth.” 

Annexure-1

Table 1: IIP growth at a glance

Chart 1: FYTD momentum in IIP stands out as the strongest in recent years

Chart 2: Investment-consumption divergence within IIP is stabilizing