Growth in India’s industrial activity sprung back into positive territory with Nov-22 IIP recording an annualized growth of 7.1% vis-à-vis a contraction of 4.2% in Oct-22. The headline print also managed to beat market expectations, with most consensus estimates expecting a tepid recovery of about 2.6%

A granular look:

• Sequential momentum for IIP was strong at 6.0%MoM in Nov-22 from a contraction of 3.5%MoM in Oct-22, also defying the average contraction of 2.0% usually seen in the month of November. This can be partly attributed to the base factor since Oct-22 was marked by heavy festivities.

• On sectoral classification, the surprisingly strong headline print was driven by sequential expansion in Mining (9.1% MoM) and Manufacturing (6.5% MoM). Electricity, in contrast recorded a sequential contraction (-1.5%MoM) though a favourable statistical base pushed annualized growth in the sector to 12.7% YoY in Nov-22 compared to 1.2% in Oct-22.

• Within the 23 sub-sectors of manufacturing, 18 registered a sequential expansion while 5 saw a sequential contraction. The top 3 industries showing expansion in sequential activity were Pharma (+33.9% MoM), Electrical Equipment (+26.9% MoM) and Food Products (+25.0% MoM). On the other hand, the bottom 3 industries in terms of sequential activity were Coke and refined petroleum (-5.1% MoM), Computer, Electronic & Optical Products (-3.4%MoM), and Paper & Paper Products (-1.9%MoM).

• On use-based classification, Nov-22 saw a broad-based organic sequential expansion driven by production of Consumer Non-durables (+24.2%MoM), Capital Goods (+12.2% MoM), and Consumer Durables (+5.2% MoM). Additional support was provided by Infra & Construction Goods, Intermediate Goods, and Primary Goods. In annualized terms, higher momentum was primarily witnessed in case of Capital Goods which reverted to positive territory along with Consumer Non-Durables Goods which is at a 19-month high.

Outlook

The larger than anticipated expansion in Nov-22 IIP reflects an improvement in the breadth of industrial activity which has displayed a general weakness in the first part of the fiscal year. Accompanying the growth in industrial activity, the healthy rabi sowing, moderating retail inflation, strength in services exports along with central government’s persistent focus on pushing through capex clearly seems to support the growth outlook over the remainder of FY23. The cumulative supportive undercurrent was visible in some of the other proxy indicators like PMI, Core output, E-Way Bills and Automobile Production which helped recoup the loss of momentum seen in holiday heavy month of Oct-22.

Having said so, we acknowledge escalating downside risks from external side amidst weakening of growth impulses due to tightening of global financial conditions, and still heightened geopolitical uncertainty. In its latest update to the Global Economic Prospects report, the World Bank slashed its growth forecast for 2023 and 2024 to 1.7% and 2.7% - this marks a sharp loss of momentum against the growth estimates of 3.0% in 2023 and 2024 provided in June 2022.

In addition, lingering weakness in manufacturing exports and sluggishness in the pace of private capex recovery along are a matter of concern. Although urban consumption is still performing relatively better, rapid pace of monetary tightening undertaken by the RBI since Apr-22 may moderate growth impulses as lending rates start catching up.

Nevertheless, we believe that the strength of domestic demand will continue to drive our GDP growth forecast of 7.0% for FY23 although with some downside risks.

Annexure-1

Table 1: IIP growth at a glance

Chart 1: Growth in consumer non-durables in Nov-22 signals moderate rural recovery