Growth in India’s industrial activity retreated into negative territory with Oct-22 IIP contracting 4.0%YoY vis-à-vis an expansion of 3.5% (revised up from 3.1% earlier) in Sep-22. The headline print was substantially below market expectations, with consensus estimate pegged marginally positive at 0.3%.

A granular look:

• Sequential momentum was weak with IIP index clocking 3.3%MoM contraction, worse than the average increase of 1.1% usually seen in the month of October.
• On sectoral classification, the uninspiring headline print was an outcome of a sharp sequential contraction in Electricity (-9.7% MoM) and Manufacturing (-4.5% MoM).
• Only mining saw a sequential expansion at a strong +12.5%MoM, despite excessive rainfall clocked in the month of Oct-22.
• Within the 23 sub-sectors of manufacturing, 21 registered a sequential contraction while only 2 saw a sequential expansion, underscoring the breadth of weakness of manufacturing activity.
• Industries showing sequential expansion were Coke & Refined Petroleum Products (+3.1% MoM), and Basic Metals (+2.9% MoM). The bottom 3 industries in terms of sequential activity were Machinery & Equipment (-20.0% MoM), Computer (-18.3% MoM), and Electrical Equipment (-15.1% MoM).
• On use-based classification, Oct-22 saw a sharp sequential contraction in production of Capital Goods (-15.6% MoM), Consumer Durables (-13.5% MoM), and Consumer Non-durables (-6.1% MoM).
• In annualized terms, production of both consumer durables and non-durables remained in contraction for the third and fourth consecutive month respectively; reinforcing the weakness in domestic demand, especially rural demand.
• In addition, growth in capital goods slipped into contraction of 2.3%YoY - the first negative print in 10 months.

Outlook

The larger than anticipated downside in Oct-22 industrial activity reflects the fragility in overall domestic demand along with the impact of a significant slowdown in global growth and exports. Recall, exports in Oct-22 too had recorded a sharp decline, coming in below USD 30 bn for the first time in 18 months. In addition, the continued contraction in consumer non-durables production primarily underscores the weakness in rural demand. While high frequency data points indicate that urban consumption, has been performing well, the rapid pace of monetary tightening of 225 bps seen so far, could prove to be a headwind, especially for discretionary leveraged consumption.  While we do acknowledge downside risks to growth outlook, Oct-22 IIP reading perhaps exaggerates the slowdown as -

• Unfavourable statistical base effects were partly responsible in pulling down IIP data for Oct-22
• Fewer number of working days (on account of Dussehra and Diwali festivals being celebrated in the same month) in Oct-22 further weighed

Having said so, we expect some support to come from -

• Strong rabi sowing (up 6.4% YoY as of Dec 2nd) that could provide an impetus to rural demand along with the healthy Kharif harvest
• The first seven months of FY23 have witnessed an aggressive pace of capex disbursal by central government, clocking a growth of ~50% on an annualised basis

While we maintain our forecast of a 7.0% GDP growth print in FY23, the uninspiring industrial activity figures along with the lower-than-expected headline CPI print for Nov-22 (at 5.88%YoY) clearly indicate that space for additional and aggressive tightening could be limited amidst increasing threat of downside growth risks. The IMF in its Oct-22 update to the World Economic Outlook report, slashed its growth forecast for 2023 world GDP and world trade by 20 bps and 70 bps to 2.7% and 2.5%, a sharp loss of estimated momentum vis-à-vis its 2022 growth estimates of 3.2% and 4.3% respectively.

Concludes Suman, Chowdhury, Chief Analytical Officer, Acuité Ratings & Research “The IIP print for Oct-22 has come at an eleventh month low which is somewhat surprising given the healthy readings coming consistently from PMI Manufacturing. Such a weak YoY figure at -4.0% has come after a fairly long time since the impact of the first wave of the pandemic was seen in the period Mar-Aug’20.

While the volatility in IIP data is baffling, it does validate an underlying weakness in domestic industrial activity due to the uncertain global environment. Exports have already seen a significant decline and the manufacturing output levels indicate a further weakness on that count. Further, the consumer goods industry output is witnessing a double digit contraction YoY which can be due to two factors – one, higher proportion of imported goods being used to addressed consumer demand and second, the still fragile nature of rural demand.”

Annexure-1

Table 1: IIP growth at a glance

Chart 1: Consumer goods growth in deep contraction in Oct-22