Growth in India’s industrial activity sprung back to positive territory with Sep-22 IIP recording an annualized expansion of 3.1% vis-à-vis a contraction of 0.7% (revised up marginally from a contraction of 0.8% earlier) in Aug-22. The headline print also managed to beat market expectations, with most consensus estimates hovering around a tepid recovery of close to 2.0%.

A deep dive into internals

• Sequential momentum in industrial activity appears to be strong with IIP clocking 1.5% MoM expansion, better than the average increase of 0.4% usually seen in the month of September.

• On use-based classification, manufacturing was the only sector to record a sequential expansion (+2.3% MoM vs. -2.7% in Aug-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 Tobacco Products (+25.7% MoM), Transport Equipment (+12.8% MoM) and Computer, Electronic & Optical Products (+12.1% MoM). On the other hand, the bottom 3 industries in terms of sequential activity were Furniture (-2.0% MoM), Paper Products (-1.4%), and Food Products (-0.9% MoM).

• On annualized basis, the improvement in headline IIP growth was led by sharp acceleration in Utilities and Mining sector. As per sectoral classification, higher momentum was primarily witnessed in case of Primary Goods, Capital Goods, and Infrastructure & Construction Goods.

• In contrast, the third consecutive annualized contraction in case of Consumer Non-durables stands out. For Q2 FY23, consumer non-durables suffered a contraction of 6.5% YoY, the worst in the series barring the initial shock in the early part of the pandemic from the imposition of nationwide lockdown.

Outlook

IIP data for Sep-22 is somewhat comforting as it signals an improvement in breadth of industrial activity. The festive season demand clearly seems to have supported the moderate revival along with central government’s persistent focus on pushing through investment spending (H1 FY23 recorded a robust expansion in capex disbursal at 49.5% YoY, over and above the healthy growth of 38.3% seen in H1 FY22). In addition, the back loaded recovery in south-west monsoon (with Sep-22 clocking a surplus rainfall of 12% vs. the long period average) ought to have provided a minor boost to sentiment. The cumulative supportive undercurrent was visible in some of the other proxy indicators like Core Infrastructure Index, GST E-Way Bills, Automobile Production, and double-digit growth in bank credit to industrial sector (for the first time since 2014).

Having said so, we also acknowledge escalating downside risks from external side amidst the anticipation of sharp weakening of growth impulses due to tightening of global financial conditions, heightened geopolitical uncertainty, and lingering of COVID related supply disruptions in China. In its latest update to the World Economic Outlook report, the IMF slashed its growth forecast for 2023 World GDP and World Trade by 20 bps and 70 bps to 2.7% and 2.5% - this marks a sharp loss of momentum vis-à-vis IMF’s 2022 growth estimates of 3.2% and 4.3% for world economic growth and global trade.

In addition, contraction in consumption-oriented production activity underscores lingering weakness in domestic demand for goods. Specifically, the drag from non-durables (consumer non-durables in the only major sector that still has not been able to recoup its pre pandemic levels of production) continues to point towards weakness in rural demand. While some of this can be expected to get offset by the headline comfort on monsoon and extension of central government’s free foodgrain distribution scheme (PMGKY got a 3-month extension until Dec-22), weakness in the run up to the festive season is a cause for concern. Although urban consumption is still performing relatively better, rapid pace of monetary tightening undertaken by the MPC since Apr-22 would eventually moderate growth impulses as lending rates start catching up.

Taking all these factors into account, we continue to maintain our FY23 GDP growth forecast at 7.0%.

Annexure-1

Table 1: IIP growth at a glance

Chart 1: Consumer goods (esp. non-durables) to recoup from pandemic era losses