March 2024 IIP tapers to 4.9%, as mining output slows sharply

14 May 2024 , 08:57 AM

MAR-24 IIP TAPERS DESPITE LOWER BASE

There was good news and some disappointing news on the IIP front for March 2024 (IIP is reported with a lag of 1 month). In the last 3 months, the high base effect had kept a cap on the IIP growth. However, this time around, the base IIP fell sharply from 6.01% in February 2023 to 1.95% in March 2023. However, despite the sharply lower base, the IIP for March 2024 tapered to 4.9%. The month saw an improvement in manufacturing and electricity output, but mining output saw a sharp fall in March 2024 as compared to February. That kept the IIP at subdued levels.

Let us quickly turn to the IIP revisions. Typically, the IIP growth goes through 2 revisions; the final revision after 3 months and the preliminary revision after 1 month. The month saw the announcement of final revision for the month of December 2023, wherein the overall IIP growth got upgraded by 14 basis points from 4.25% to 4.39%. At the same time, the first revision for February 2024 saw the IIP figure tapering marginally by 7 basis points from 5.67% to 5.60%. Overall, the show was mixed and does not give too much of an insight on how the revisions for March IIP data will pan out in the first and final estimates.

HIGH FREQUENCY IIP GROWTH ROBUST IN MAR-24

The regular IIP growth that we see is yoy growth; compared to the year-ago period. However, the yoy number is too vulnerable to the base effect and does not capture the short term eccentricities of IIP data. That gap is filled by MOM high frequency IIP data. How does that look for March 2024? For the month of March 2024, the high frequency mining IIP was up 11.74% and the high frequency electricity IIP was also up 9.14%. There was also a similar trend in manufacturing; which showed MOM growth of 9.14%. This resulted in the overall MOM (high frequency) IIP reading for March 2024 sharply up by 8.23%. The MOM numbers have flattered across the board, with all 3 segments shining in a tough market.

MINING, MANUFACTURING, ELECTRICITY – A MIXED BAG

In the last 3 months, the trend in mining, manufacturing, and electricity have been oscillating. For example, in January 2024, it was manufacturing growth that was relatively tepid, while mining and electricity showed robust growth. In February 2024, all 3 showed sharply better levels compared to the previous month. However, in March 2024, Manufacturing and Electricity growth was robust, while mining output fell sharply.

Let us start with mining IIP for March 2024 on yoy basis. The March 2024 mining IIP growth was tepid at just 1.2%, compared to 8.1% in February 2024. If you look at electricity IIP, it stood at 8.6% in March 2024, compared to 7.5% in February 2024. The positive trend was sustained by manufacturing too, which saw IIP growth in March 2024 surge to 5.2% compared to just 4.9% in February 2024. As a result, the overall IIP for March 2024 at 4.9% was lower than the revised IIP reading of 5.6% for February 2024. Mining proved to be major drag on IIP in March 2024.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

The table captures monthly IIP growth number on yoy basis. Despite the base IIP number between February 2023 and March 2023 shifting sharply lower from 6.01% to 1.95%; the yoy IIP in March was lower than in February by nearly 70 bps. This is partially attributed to election related weakness in key output stacks.

Month	IIP Growth (%)
Mar-23	1.95%
Apr-23	4.61%
May-23	5.66%
Jun-23	4.05%
Jul-23	6.18%
Aug-23	10.87%
Sep-23	6.35%
Oct-23	11.89%
Nov-23	2.47%
Dec-23	4.39%
Jan-24	4.14%
Feb-24	5.60%
Mar-24	4.94%

Data Source: MOSPI

There are 2 positive takeaways from the latest IIP data. Firstly, the Red Sea crisis and the disruption of trade routes, is only having a limited impact on the overall IIP. That is good news and it is also not surprising since India continues to be an inward looking economy. The other positive takeaway is the gradual revival in rural demand. Many Indian companies have tweaked packaging sizes to keep the rural consumers happy; and the outcome is that the Indian rural consumer is back to her buying ways. It remains to be seen if it sustains, but the new packaging logic appears to have given a rural thrust to IIP growth.

MAR-24 IIP BASKET: MINING PROVES A DRAG ON IIP

The table captures comparative IIP growth for last 4 months, with respective component weights. Cumulative numbers for mining, manufacturing, and electricity are segregated.

Product Basket	Weights	Dec-23	Jan-24	Feb-24	Mar-24
Manufacture of food products	5.3025	3.4	-0.2	2.9	-3.9
Manufacture of beverages	1.0354	3.3	7.8	14.9	0.4
Manufacture of tobacco products	0.7985	-8.7	-7.4	-0.5	-17.9
Manufacture of textiles	3.2913	1.4	3.1	3.6	-0.8
Manufacture of wearing apparel	1.3225	-10.0	-2.9	-2.9	7.5
Manufacture of leather and related products	0.5021	-2.5	0.1	1.7	-10.3
Manufacture of wood products	0.1930	-12.3	3.5	7.0	3.1
Manufacture of paper products	0.8724	-7.6	-6.2	4.7	0.1
Printing and reproduction of recorded media	0.6798	-4.5	2.6	6.0	1.6
Manufacture of coke and refined petroleum products	11.7749	7.3	-2.2	4.1	-1.1
Manufacture of chemical products	7.8730	-1.5	-1.9	1.6	-0.3
Manufacture of pharmaceuticals	4.9810	3.6	0.0	-10.6	16.7
Manufacture of rubber and plastics products	2.4222	1.4	6.1	12.6	5.8
Manufacture of other non-metallic mineral products	4.0853	3.0	4.2	8.8	7.7
Manufacture of basic metals	12.8043	9.1	7.3	9.1	7.7
Manufacture of fabricated metal products	2.6549	6.3	19.0	14.3	20.3
Manufacture of computer, electronic and optical products	1.5704	-5.2	-7.4	1.9	-1.0
Manufacture of electrical equipment	2.9983	6.9	3.1	9.8	14.0
Manufacture of machinery and equipment	4.7653	0.0	3.1	3.7	2.5
Manufacture of motor vehicles, trailers, and semi-trailers	4.8573	10.3	19.0	11.6	6.6
Manufacture of other transport equipment	1.7763	29.4	25.3	24.4	25.4
Manufacture of furniture	0.1311	-0.5	15.1	22.7	31.0
Other manufacturing	0.9415	-24.6	-6.6	-6.5	-17.1
MINING	14.3725	5.2	5.9	8.1	1.2
MANUFACTURING	77.6332	4.6	3.6	4.9	5.2
ELECTRICITY	7.9943	1.2	5.6	7.5	8.6
OVERALL IIP	100.0000	4.4	4.1	5.6	4.9

Data Source: MOSPI

The last column shows the most current IIP reading for February 2024. IIP numbers are reported with a lag of 1 month. Here are the key takeaways.

• The IIP growth of 4.9% in March 2024, compared to 5.6% in February 2024, was despite a sharply lower base. That means, mining has put pressure, despite better than expected growth in manufacturing, and electricity production. The overall IIP obviously gravitated towards the manufacturing growth, considering its 77.6% weightage in the IIP basket.
• In the month of March 2024, the products that saw the highest positive growth were furniture, transport equipment, fabricated metal products, pharmaceuticals, electrical equipment, basic metals, minerals and wearing apparel. These are largely domestic demand triggered. The products that saw the sharpest fall in IIP include tobacco products, other manufacturing, leather, and food products. Apart from weak demand, the exports are also being hit by the Red Sea crisis and that is slowing this segment.

In March 2024, IIP grew at a slower pace, despite the lower base. That can be largely attributed to the sharp fall in mining sector growth amidst the political and election uncertainty. That is surely taking its toll.

READING BETWEEN THE LINES OF FY24 DATA

The table captures the IIP growth over last 4 fiscal years. The latest fiscal year FY24 is the full fiscal year from April 2023 to March 2024. The cumulative IIP growth for FY24 is better than FY23 by a margin of 60 basis points; although this could change marginally, once the revisions to IIP growth for March 2024 come in.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24
Manufacture of food products	5.3025	-2.7	5.9	3.8	1.4
Manufacture of beverages	1.0354	-25.8	11.5	19.9	5.1
Manufacture of tobacco products	0.7985	-14.3	8.7	-0.6	-8.1
Manufacture of textiles	3.2913	-21.3	29.3	-8.7	0.5
Manufacture of wearing apparel	1.3225	-29.9	27.4	-7.4	-14.2
Manufacture of leather and related products	0.5021	-18.0	1.3	-5.8	-1.1
Manufacture of wood products	0.1930	-19.6	15.1	-0.8	-5.9
Manufacture of paper and paper products	0.8724	-23.3	17.7	0.6	-3.6
Printing and reproduction of recorded media	0.6798	-28.0	12.4	23.4	-1.2
Manufacture of coke and refined petroleum	11.7749	-12.2	8.9	5.7	3.7
Manufacture of chemicals and chemical products	7.8730	-2.1	4.3	6.9	-1.7
Manufacture of pharmaceuticals	4.9810	1.6	1.3	-2.4	8.0
Manufacture of rubber and plastics products	2.4222	-3.7	8.0	0.5	4.4
Manufacture of other non-metallic mineral products	4.0853	-12.9	20.1	6.6	6.7
Manufacture of basic metals	12.8043	-5.8	18.6	8.1	11.5
Manufacture of fabricated metal products	2.6549	-13.7	10.9	-1.6	8.4
Manufacture of computer, electronic and optical	1.5704	-12.6	11.1	-6.4	-11.4
Manufacture of electrical equipment	2.9983	-12.3	12.2	-4.2	7.5
Manufacture of machinery and equipment	4.7653	-14.1	11.0	10.5	6.4
Manufacture of motor vehicles and trailers	4.8573	-19.1	18.4	19.3	11.6
Manufacture of other transport equipment	1.7763	-18.0	1.6	11.6	13.9
Manufacture of furniture	0.1311	-27.9	23.3	16.4	-6.9
Other manufacturing	0.9415	-22.5	49.0	-3.0	-6.2
MINING	14.3725	-7.8	12.2	5.8	7.5
MANUFACTURING	77.6332	-9.6	11.8	4.7	5.5
ELECTRICITY	7.9943	-0.5	7.9	8.9	7.1
OVERALL IIP	100.0000	-8.4	11.4	5.2	5.8

Data Source: MOSPI (FY24 is for full fiscal year)

The last column refers to data for FY24; as we now have the full year data for the 12 months stretching from April 2023 to March 2024.

• How does FY24 look, compared to FY22 and FY23. That may be like comparing apples and oranges because FY22 was on a very low base as FY21 was the year of COVID shutdowns. Hence FY24 and FY23 should offer a more reliable comparison. FY23 saw full year IIP growth normalize to 5.2%, while FY24 has demonstrated full year FY24 IIP growth of 5.8% (60 bps spike). There are positive signals like strong quarterly results, revival in rural demand, better than expected GDP, restrained current account deficit (CAD) as a percentage of GDP etc.
• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth for FY24. IIP boost for the full fiscal year FY24 stems from sectors like transport equipment, motor vehicles, basic metals, fabricated metal products, pharmaceuticals, electrical equipment, machinery & equipment, and minerals. What about negative pressures? The IIP losers in FY24 were the standard suspects like apparel, computer & electronics, tobacco products, furniture, wood products, paper products and chemicals. The common thread was the export stress.

Ironically, the IIP data has been robust despite the Red Sea crisis. This can be attributed to the trickle-down effect of the PLI schemes and revival of capital investment cycle through aggressive capex spending by the government of India over the last 3 years.

WHY THE RBI WILL BE LOOKING CLOSELY AT THE IIP FIGURE

Unlike the US Fed, RBI has been more sensitive to growth triggers, and rightly so. The latest April 2024 RBI monetary policy marked the seventh consecutive monetary policy when the RBI has held rates static at 6.5%. The question is whether the RBI will attempt a pre-emptive rate cut, on the lines of what the Fed may also be planning? The US Fed has been cautious about cutting rates as it does not want inflation spiking amidst the elections.  The RBI is already leaning towards 8% GDP growth in FY24 and over 7% in FY25 too. With low inflation, the net positives are likely to create a positive cascading effect in the economy.

At a macro level, there could be 2 factors justifying a pre-emptive rate cut by the RBI. Firstly, the real rates (interest rates net of inflation) are much higher than the median. For FY25, the real rates are expected to be closer to 250 bps. Secondly, at 6.5%, the repo rates are 135 bps above the pre-COVID rate of 5.15%. If political stability comes with the election outcome, then the RBI may have reasons to use the euphoria to cut rates to reduce the cost of Indian borrowers. As Mao said, “May we live in interesting times”!