December 2023 IIP picks up to 3.84%, as base effect weakens

13 Feb 2024 , 10:55 AM

December 2023 IIP picks up on lower base effect

Last month, we had spoken about the Diwali effect which had spiked the base and reduced IIP growth to just 2.40% in November. However, in December 2023, that normalized back to 3.84%. IIP growth was in double digits in 3 out of the last 5 months, so the current IIP growth at 3.84% is still lower than the recent average. The base effect worked favourably for the IIP growth in December 2023. Between October 2022 and November 2022, the IIP base had shifted from -4.07% to 7.58%. This had caused the sharp fall in IIP in November 2023. However, between November 2022 and December 2022, the IIP growth fell from 7.58% to 5.12%. This lower base resulted in a higher IIP growth in December 2023 at 3.84%. 

Manufacturing was the IIP swing factor in December

What is interesting is that dichotomy in the IIP bounce in the latest month of December 2023. Remember, IIP is presented with a lag of one month. That means December IIP will be presented in mid-February; January in mid-March and so on. For December 2023, the growing in mining IIP and electricity IIP were sharply lower than November 2023. However, this was more than compensated by a sharp spike in the Manufacturing IIP in the month of December. With manufacturing having a weightage of 77.6% in the IIP basket, the overall IIP growth obviously gravitates towards the manufacturing IIP swing factor.

Mining, manufacturing, electricity – a tale of dichotomy in growth

We have explained the dissonance of the base effect in the opening para and that is the reason for this bounce in IIP for December 2023 to 3.84% compared to just 2.40% in November 2023. The dichotomy lies in the components. Mining output fell sharply to 5.1% in December 2023, from 7.0% in November 2023. The fall was also visible in the electricity component of the IIP basket which fell sharply from 5.8% to 1.2% in the latest month. However, what stood out was manufacturing growth in December 2023. It bounced sharply from 1.2% in November 2023 to 3.9% in December 2023, proving to be the key driver of higher overall IIP growth in the month of December 2023.

The impact of manufacturing gets magnified on the IIP, since manufacturing has a weight of 77.63% in the overall IIP basket. It would also be pertinent to see how the latest month updates the cumulative IIP growth data for the FY24 period (updated for the nine months up to December 2023). The cumulative IIP growth for the first 9 months of FY24 stood at 6.1%. This comprised of mining IIP growth at 8.5%, manufacturing IIP growth at 5.6% and electricity IIP growth at 7.0% on a cumulative basis for the first 9 months of FY24.

How IIP panned out over last one year

The table captures monthly IIP growth number on yoy basis. The base IIP number between November 2022 and December 2022 shifted lower from 7.58% to 5.12%; causing the bounce in the IIP as the Diwali effect (which was predominant last month) started to wane.

Month	IIP Growth (%)
Dec-22	5.12%
Jan-23	5.81%
Feb-23	6.01%
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	11.58%
Nov-23	2.40%
Dec-23	3.84%

Data Source: MOSPI

In the 4 months prior to December 2023, IIP growth was in double digits twice. However, both these months had a negative base and hence we may have to look at IIP growth on a more normalized base to decipher traction. If one looks at the components of IIP, it is clear that the maximum pressure on IIP is coming from export oriented sectors like textiles, chemicals jute, computers, and paper; where exports have taken a serious hit amidst weak global demand. It is the domestic growth stories that are actually holding up the IIP story.

What about IIP revisions? The IIP numbers go through two revisions. A month after the IIP announcement, it goes through the first revision and 3 months later it goes through the final revision. The September 2023 IIP underwent final upward revision of 15 basis points from 6.20% to 6.35%. The November 2023 IIP first revision saw no change as it stayed put at 2.40%. We now have to await the final revision to November 2023, after 2 months. 

Dec-23 IIP basket: what flattered and what faltered?

IIP is a basket of products classified into mining, manufacturing, and electricity. The table below captures comparative IIP growth for last 4 months, with their respective weights.

Product Basket	Weights	Sep-23	Oct-23	Nov-23	Dec-23
Manufacture of food products	-0.9	-0.9	7.3	-3.9	1.2
Manufacture of beverages	6.6	6.6	9.7	8.4	3.3
Manufacture of tobacco products	-5.1	-5.1	0.4	-15.0	-9.4
Manufacture of textiles	4.3	4.3	6.9	-4.3	1.6
Manufacture of wearing apparel	-18.2	-18.2	-5.4	-20.6	-10.3
Manufacture of leather and related products	-0.5	-0.5	18.5	-16.2	-4.0
Manufacture of wood products	4.3	4.3	-0.2	-15.7	-12.4
Manufacture of paper products	-3.8	-3.8	2.8	-3.9	-6.2
Printing and reproduction of recorded media	-3.7	-3.7	3.6	-3.7	-2.5
Manufacture of coke and refined petroleum products	2.7	2.7	2.4	14.2	6.9
Manufacture of chemical products	-5.8	-5.8	4.2	-4.0	-0.2
Manufacture of pharmaceuticals	7.4	7.4	11.3	-2.4	3.0
Manufacture of rubber and plastics products	1.4	1.4	6.6	1.8	2.1
Manufacture of other non-metallic mineral products	4.7	4.7	13.0	-3.0	1.4
Manufacture of basic metals	15.0	15.0	11.9	7.2	7.3
Manufacture of fabricated metal products	10.5	10.5	19.2	-5.3	8.9
Manufacture of computer, electronic and optical products	-8.8	-8.8	-7.4	-24.0	-5.2
Manufacture of electrical equipment	8.0	8.0	13.3	-17.2	4.1
Manufacture of machinery and equipment	5.0	5.0	25.2	-1.0	-0.1
Manufacture of motor vehicles, trailers, and semi-trailers	10.9	10.9	24.7	9.2	9.2
Manufacture of other transport equipment	7.1	7.1	23.3	9.8	29.4
Manufacture of furniture	-18.4	-18.4	-6.8	-30.5	-1.0
Other manufacturing	-13.0	-13.0	30.7	-15.1	-26.4
MINING	11.5	11.5	13.1	7.0	5.1
MANUFACTURING	5.1	5.1	10.2	1.2	3.9
ELECTRICITY	9.9	9.9	20.4	5.8	1.2
OVERALL IIP	6.4	6.4	11.6	2.4	3.8

Data Source: MOSPI

The last column showing the latest December 2023 IIP numbers; and that has been shaded for clarity. Here are some of the major takeaways.

• The IIP growth of 3.84% in December 2023, compared to 2.40% in November 2023, was largely influenced by the base effect. At a broad level, there was a dichotomy in the components. While the IIP growth of mining and electricity fell in December 2023 compared to November 2023, manufacturing IIP saw a spike over previous month. The impact was visible on the overall IIP due to the 77.6% weight that manufacturing IIP has in the overall IIP basket.

   

• In the month of December 2023, the products that saw the highest positive growth were Motor Vehicles & trailers, fabricated metals, base metals, coke & refined petroleum products, electrical equipment, and beverages. These are driven by domestic demand and the maximum demand traction was seen in these products. The products that saw the sharpest fall in IIP include miscellaneous products, wood products, wearing apparel, tobacco products, paper products, computers, and furniture (same suspects as last month). Apart from weak demand, the exports are also being hit by the Red Sea crisis.

While the taming of the base led to a bounce in IIP, the manufacturing bounce may struggle to sustain in the coming months. That could be a challenge.

How we read the annual IIP data for FY24 (Apr-Dec)

The table below captures the IIP growth on an annualized basis over last 4 financial years. The IIP granular product basket is presented; along with a consolidated view. The latest fiscal year that FY2023-24 refers to 8 months cumulative data from April to December 2023.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.30	-2.7	5.9	3.8	1.8
Manufacture of beverages	1.04	-25.8	11.5	19.9	4.1
Manufacture of tobacco products	0.80	-14.3	8.7	-0.6	-8.0
Manufacture of textiles	3.29	-21.3	29.3	-8.7	0.0
Manufacture of wearing apparel	1.32	-29.9	27.4	-7.4	-19.1
Manufacture of leather and related products	0.50	-18.0	1.3	-5.8	-0.7
Manufacture of wood products	0.19	-19.6	15.1	-0.8	-9.0
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-3.9
Printing and reproduction of recorded media	0.68	-28.0	12.4	23.4	-2.2
Manufacture of coke and refined petroleum products	11.77	-12.2	8.9	5.7	4.9
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-2.0
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	10.0
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	3.1
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	6.4
Manufacture of basic metals	12.80	-5.8	18.6	8.1	12.4
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	5.7
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-14.2
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	6.6
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	7.7
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	11.0
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	10.3
Manufacture of furniture	0.13	-27.9	23.3	16.4	-15.9
Other manufacturing	0.94	-22.5	49.0	-3.0	-4.8
MINING	14.37	-7.8	12.2	5.8	8.5
MANUFACTURING	77.63	-9.6	11.8	4.7	5.6
ELECTRICITY	7.99	-0.5	7.9	8.9	7.0
OVERALL IIP	100.00	-8.4	11.4	5.2	6.1

Data Source: MOSPI (# Apr-23 to Dec-23)

The last column refers to data for the first 9 months of FY24; although that is long enough to extrapolate the full-year picture.

• How does FY24 look, compared to FY22 and FY23. To be fair, FY22 was on a very low base since FY21 was the year of COVID shutdowns. Hence it is not comparable. FY23 saw full year IIP growth normalize to 5.2%, while for first 9 months of FY24, cumulative IIP growth stands at 6.1% (30 bps lower than last month). It is early to say if IIP can pick up, but there are positive signals like revival in capital investment cycle and government capex spending, overflowing order books for capital goods companies and a sharp revival in core sector growth. Interim budget has kept the capex spending robust.

   

• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth. IIP growth stems from sectors like basic metals, machinery & equipment, motor vehicles & trailers, pharmaceuticals, and electrical equipment. What about negative triggers? Pressure has come in FY24 from wearing apparel, computer & electronics, furniture, and tobacco products. No prizes for guessing; the common link is that these are export products; where weak global demand hit exports. 

For FY24 so far, annualized IIP for FY24 is 90 bps better than FY23. The more gratifying news is that manufacturing IIP for FY24 is 170 bps above FY23. This can be attributed to the trickle-down effect of the PLI schemes and revival of capital investment cycle, amidst higher capex spending and targeted policy measures.

Is there a base case for RBI to cut rates now?

In the recent February 2024 monetary policy, RBI held status quo on rates for the sixth time in a row. While RBI kept its estimates for FY24, the FY25 GDP growth has been pegged at 7.0% and FY25 inflation at 4.5%. The RBI surely finds itself in a dilemma. The inflation has come down sharply, the real rates are substantially higher than normalized median and IIP growth is still struggling to bounce to the next level. The missing link in the entire story is, perhaps, the relatively higher cost of funds due to elevated interest rates.

The moot question then is, will the RBI venture to cut rates in the first half of 2024? The RBI, in previous interactions, underlined that it was price stability and not growth driving RBI policy. However, we have seen in February last year when the RBI decided to halt rate hikes after repeated requests from industry bodies. India real benchmark yields are well above 2% while the current repo rates are a full 135 bps above the pre-COVID levels. However, with elections in May and the Kharif uncertainty, the RBI may still prefer the luxury of more data points till June 2024 before taking a call on rates!