Growth in India’s industrial production (IIP) eased to 5.8% YoY in Sep-23 from 10.3% in Aug-23. The outcome was lower than expected when compared to the market consensus of 7.0%. It also marked the first negative surprise in last four months. 

A granular look:

• On a sequential basis, IIP contracted by 2.4% MoM led by broad based weakness across key sub-sectors. On a seasonal basis, this performance was worse than typically seen in the month of September, where the average sequential growth stands at 0.4%
• At a granular level, among the 23 manufacturing sub-sectors, 10 registered a sequential expansion while 13 registered a sequential contraction.
• The top 3 manufacturing industries recording an expansion in sequential activity were Transport Equipment (+13.8% MoM), Computer Electronic & Optical Products (+13.5%MoM), and Tobacco Products (+10.8% MoM). The bottom 3 industries were Coke & Refined Petroleum Products (-7.1% MoM), Non-Metallic Mineral Products (-7.0%), and Food Products (-6.7%).
• On annualised basis, growth in mining held up to mark its third consecutive double-digit print, while moderation was led by index heavyweight manufacturing as well as electricity sub-sectors. 
• On use-based side too, the moderation was broad-based, with Consumer goods leading the downside as growth slipped from 8.0% YoY in Aug-23 to 1.9% in Sep-23. 

Outlook

Moderation in Sep-23 IIP growth is line with the most other high frequency indicators which too had reflected some loss of activity momentum. Growth in Sep-23 may have been adversely impacted by seasonality due to timing of Diwali this year which is being celebrated in November. As such, some of the festive season related economic activities have shifted to October-December quarter. 

The overall industrial landscape continues to provide a somewhat mixed picture: 

• Healthy pace of Government capex, with total capex of centre and states clocking an expansion of a robust ~46% YoY during Apr-Sep FY24 compared to ~30% over the same period in FY23 which has supported growth so far. While this trend is likely to remain largely intact in the coming months amidst strong budgetary support from the central government and extension of interest free loans to states, some pull-back in Q4 cannot be ruled out assuming adherence to budgeted targets.
• Consumption of goods remains somewhat sluggish as validated by weakness in production of consumer durables within IIP (-0.7% on FYTD basis) – a reflection of a dilution in pent-up demand and pass-through of higher interest rates. A festive season spurt could lead to some buoyancy in demand in Q3 FY24, along with Government’s fiscal support measures such as the recent reduction in LPG cylinder price, upward revision in DA (Dearness allowance) of Government employees, stronger revision in wheat MSP, extension of free foodgrains for next 5 years among other measures.
• Labor-intensive industrial activity remains sluggish, weighed down by weak export demand for textiles, wearing apparels and leather. The external sector is unlikely to offer any support amidst expectations of a slowdown in merchandise trade. In its Oct-23 World Economic Outlook update, the IMF revised lower its forecast for merchandise trade volume growth for 2023 to 0.9% from 2.0% earlier (and 5.1% in 2022) – in line with WTO’s estimates. 
• The comfort from lower input costs enjoyed for three consecutive quarters over Q4 FY23 and Q2 FY24 appears to be also on the wane amidst the recent rise in commodity prices, led by volatile crude oil. 

So far, in H1 FY24, IIP has recorded a healthy growth of 6.0%YoY, with monthly prints surprising on the upside in most months. Overall, we expect growth in industrial production to moderate in FY24, from 5.2% recorded in FY23. 

Says Suman Chowdhury, Chief Economist and Head -Research, Acuité Ratings & Research “Industrial activity has seen a healthy uptick in the first half of the current fiscal with IIP growth at 6.0%YoY which is one of the highest prints for H1 if one excludes the last 2 years after Covid. While there still was some moderate base support, steady implementation of infrastructure projects has continued to boost demand for cement and steel while rainfall deficiency in the monsoon season has driven the demand for power and coal. Without the base support and risks of weaker rural demand, we expect IIP growth to moderate in the second half of the fiscal. On an overall basis, IIP growth is likely to be lower than 5.3% recorded in the previous year.”

Table 1: IIP growth at a glance

Chart 1: IIP trajectory in H1FY24

Chart 2: Labour intensive sub-sectors lagging headline growth