Growth in India’s industrial production accelerated to a 16-month high of 11.7% YoY in Oct-23 from 6.2% (revised up from 5.8% reported earlier) in Sep-23. To be sure, while market participants were expecting a strong print (with consensus estimates around ~10%) on the back of a favorable statistical base (IIP contraction in Oct-22) and festive season support, the actual outturn posted a pleasant surprise.

A granular look:

• On a sequential basis, IIP expanded by 1.8% MoM, nearly reversing the 2.1% decline recorded in Sep-23. 
• At a granular level, among the 25 industrial sub-sectors, 11 registered a sequential expansion while 14 registered a sequential contraction.
• The top 3 manufacturing industries recording an expansion in sequential activity were Non-Metallic Minerals (5.9% MoM), Food (5.7% MoM), and Paper (4.4% MoM). The bottom 3 industries with respect to sequential activity were Computer, Electronic and Optical Products (-15.9% MoM), Wood (-12.8% MoM), and Electrical Equipment (-11.9% MoM).
• On annualised basis, the increase appears broad-based from the sectoral side. Notably, the Mining sector posted its fourth consecutive double-digit expansion and stands out as a key outperformer on cumulative basis in FY24 so far. Coal production in the country is expected to touch a new high in the current fiscal on the back of robust power demand.  
• On use-based side too there appears to be support from most sub-sectors. Notably, both investment-oriented and consumption-oriented industrial production registered their double-digit annualized expansion – the last time we saw this dual double-digit growth was in Jun-22. 

Outlook

IIP’s strong performance in Oct-23 highlights two key themes:

• There is continuation of public capex thrust by the government. The combined capex disbursal by both central and state governments have clocked a robust growth of 41.0% YoY over Apr-Oct FY24, over and above a healthy expansion of 33.3% seen in the corresponding period in FY23. This has buoyed capital goods, infrastructure, and construction sectors with IIP.
• The festive season along with some support from the Cricket World Cup and the expenditure incurred during the five State Elections helped to strengthen consumption to some extent. Automobiles, tractors, and pharmaceuticals have been the prime beneficiaries of the recent revival in consumption. Having said so, we acknowledge the underlying volatility in consumption-oriented production with overall recovery still appearing subdued.

Going forward, as supportive seasonality wanes, and as the impact of domestic monetary tightening and anticipated global slowdown starts to weigh, industrial activity momentum could moderate.

• Some of the leading indicators for Nov-23 (like E-way bill generation, fuel consumption, auto sales) have started hinting at reversal of the festive momentum.
• Amidst the projected downside to kharif output (as per government’s first advance estimate) and El Nino conditions possibly weighing on rabi output early next year, the rural demand trajectory could be tentative. This requires continued support from the government (reduction in LPG cylinder prices and extension of free foodgrain program are measures already put in place offering support to rural incomes) to hold up the rural consumption. 
• Global demand continues to be lacklustre – this has been weighing upon export-oriented labour-intensive sectors within IIP for some time. As per the WTO’s latest forecast, global merchandise trade volume growth in 2023 is expected to grow at 0.8%, downgraded lower from 1.7% earlier.

So far, IIP has recorded a healthy growth of 6.9% YoY in Apr-Oct FY24 compared to 5.3% in the corresponding period in FY23. We believe growth momentum could moderate hereon on account of the absence of a favourable base factor along with the above-mentioned factors in the remaining months of FY24. From GDP perspective, we maintain our view of incremental moderation, with H2 FY24 growth coming in around 5.7% compared to a growth of 7.7% seen in H1 FY24.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “The industrial index of production (IIP) saw a sharp rise in growth to 11.7% YoY in Nov-23 vs 6.2% YoY but this can be partly attributed to the base factor with IIP having contracted by 4.1% in Nov-22. Typically, there is a distortion in the growth figures for Oct-Nov on account of the exact position of the festive holidays since it has implications for actual output during the month. On a sequential basis, the IIP has grown by 1.8% compared to Oct-23. While all the three sectors saw robust growth figures, the power sector notched up a very high growth of 20.4% YoY due to the drop in power generation seen in the previous year driven by the shortage in coal supply; further, power demand has also been higher this fiscal given the rainfall deficiency, warmer weather conditions and the higher needs in the agricultural sector. 

Higher investments in the infrastructure sector have led to a solid 11.3% YoY in construction goods; while consumer goods have shown a strong output growth at 11.6% YoY, there has been a slight sequential decline of 1.3% in Nov-23, possibly due to the expectation of weaker demand after the festival season. Given the expectation of a moderation in rural demand, the output of consumer goods will be a monitorable going forward. 

Overall, IIP growth stands strong at 6.9% YoY in the Apr-Oct’23 period but it will be difficult to sustain such a growth print for the whole year. We expect IIP growth for FY24 to settle down at around 6.0% which will still be robust and reflect a significant uptick in industrial activity.” 

Table 1: Annualized growth in IIP and its key components

Chart 1: Investment-oriented output continues to be steady

Chart 2: Early signs of moderation in Nov-23 IIP

Chart 3: Cumulative IIP Trend: FY24 YTD