Growth in India’s industrial production (IIP) decelerated sharply into low single-digit of 2.4%YoY in Nov-23, from a robust expansion of 11.6% Oct-23 (revised marginally lower from 11.7% earlier). While market consensus was geared up for a sizeable deceleration, the headline number surprised on the downside. 

A granular look:

• On annualised basis, the moderation was broad-based with growth slipping sharply from double-digits into low single digits. Notably, manufacturing growth at 1.2% was the lowest in last 13 months. 
• On a sequential basis, IIP contracted by 2.4% MoM, higher than the 1.2% decline typically recorded in November. The downside was led by and electricity (-13.5%MoM) and manufacturing (-1.7%MoM) sectors, even as mining activity recorded a sequential expansion. 
• At a granular level, among the 23 manufacturing sub-sectors, only 5 registered a sequential expansion while 18 registered a sequential contraction.
• The top 3 manufacturing industries showing an expansion in sequential activity were Pharma, medicinal chemical & botanical products (+16.0%MoM), Food products (14.4%), and Coke & Refined Petroleum Products (6.0% MoM). The bottom 3 industries with respect to sequential activity were Miscellaneous manufacturing products (-36.4%MoM), Computer, electronic & optical products (-22.5%MoM), and Furniture (-18.2% MoM).
• On use-based side too, the moderation was broad-based with growth slipping into contraction for capital as well as consumer goods.  
  1. Capital goods growth, at -1.1%YoY and consumer durables at -3.6% marked the weakest pace in last 13 months
  2. Steepest contraction was recorded by consumer durables, at -5.4%

Outlook

The sharp moderation in Nov-23 annualised IIP growth is in line with the high frequency lead indicators, which had seen a let-up in growth momentum. The end of festive season in Nov-23, lower number of working days due to Diwali holidays, shift in timing of Diwali to November in 2023 vis-à-vis October in 2022, along with an adverse base cumulatively weighed on the industrial activity.  

1. E-way bills from a record high of 10.0 Cr moderated to a 4-month low of 8.8 Cr in Nov-23
2. Growth in sales of passenger vehicles moderated to 21.0%YoY in Nov-23 from 33.9% in Oct-23
3. Core sectors growth slipped to 7.8%YoY in Nov-23, from 12.0% in Oct-23

Having said so, the performance of IIP cumulatively over the festive months (i.e., Sep-Oct-Nov) was much strong at 6.6% in FY24 compared to 2.2% over the corresponding period in FY23. 

Looking ahead, with an end to festive seasonality, and as the impact of domestic monetary tightening and anticipated global slowdown starts to weigh, industrial activity momentum could remain subdued. 

• Some of the leading indicators for Dec-23 (such as manufacturing PMI, auto sales etc.) have shown a further deceleration in momentum. 
• Amidst the downside to rabi sowing, as well as possibility of El Nino weighing on rabi output, the rural demand recovery will remain mild. Continued support from the government on the lines of measures already announced such as reduction in LPG cylinder prices, extension of free foodgrain program ahead of elections, may cushion the downside in rural demand.
• Strong expansion of Government capex has offered support to industrial activity, so far in FY24. The front loading of capex may however imply weaker momentum in Q4 FY24, amidst adherence to fiscal deficit targets. 
• Global demand continues to be lacklustre – this has been weighing upon export-oriented labour-intensive sectors within IIP for some time. While international agencies do expect a pick-up in global trade in 2024 (led by goods recovery) with WTO’s forecast too pegged at 3.3% (vs. 0.7% in 2023), benefits for India may be limited as our key DM trading partners including US are slated to record slower growth. 
• In addition, the latest escalation of geopolitical disturbance in the Middle East region (esp. involving the Red Sea trade route) could dampen the anticipated global trade recovery in 2024. 

We believe IIP growth could remain on moderate turf hereon on account of the above-mentioned factors in the remaining months of FY24. From GDP perspective, we have revised our growth forecast upwards to 6.8% which is still 50 bps lower than the NSO’s projected growth of 7.3% in FY24. 

Says Suman Chowdhury, Chief Economist and Head- Research, Acuité Ratings & Research “Industrial output for Nov-23 has disappointed even factoring in the impact of the festival holidays during the month and the adverse base factor. IIP has recorded a modest growth of 2.4% YoY, the lowest print in eight months since Mar-23. The IIP figure has been pulled down by the manufacturing sector which posted the lowest annualized growth of 1.2% in 13 months after a solid momentum in the early part of the fiscal. While a moderation in industrial activity is typically seen in the post festive season, the extent has taken us by surprise. 

Notwithstanding the sharp downward adjustment, the cumulative industrial output growth in the Apr-Nov’23 period stood at 6.4% and we expect that figure to be higher than 6.0% for the whole fiscal driven by the increased investments in infrastructure. However, the data on IIP is possibly an early indicator of the expected moderation in growth in the fourth quarter of FY24. While we have revised our GDP growth forecasts for FY24 to 6.8%, we expect the growth trajectory to slow down gradually over the next few quarters.”    

Table 1: Annualized growth in IIP and its key components

Chart 1: The sharp decline in PMI manufacturing in Dec-23, doesn’t augur well for IIP