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IIP shocks market as it dips 4.0% in October 2022

  • India Infoline News Service
  • 13 Dec , 2022
  • 9:20 AM
However, IIP had bounced back in September. Now, we have 2 negative IIP readings in the last 3 months and that is hardly an elevating feeling.
The only redeeming factor is that the first revision for September IIP growth has been favourable, being upgraded from 3.09% to 3.47%. That does give hope that the October IIP contraction should be less intense eventually. Aggressive rate hikes by RBI, weak global demand, tepid consumer spending and a major dent on exports hit IIP for October 2022.

In October, there is no base effect to blame because the October 2021 base IIP growth at 4.17% was almost similar to 4.35% in September 2021 However, the 3.47% IIP growth in September 2022 has been contrasted by the -4.0% contraction in October 2022. Growth is still positive across mining and electricity, but manufacturing bore the brunt of the slowdown. With weightage of 77.6% in IIP basket, manufacturing has hit IIP growth hard.



Data Source: MOSPI

The domestic economy and the globally economy are delicately poised. The Ukraine war is threatening to create a full blown energy crisis. Fears of slowdown in the US, UK and the EU is making customers and corporates cautious; hitting demand and exports. Also, the rather hawkish stance adopted by the RBI to control inflation is having a deep impact on growth. inflation us down sharply in response to RBI hawkishness but IIP growth will be the worry.

How the IIP sectoral break-up looked like in October 2022

October 2022 marks the seventh month of fiscal year FY23. Let us start with the 3 principal components of IIP in October 2022 viz. mining, manufacturing and electricity. Mining growth for October 2022 was 2.46%, manufacturing contracted by -5.65% while Electricity grew at 1.20%. Overall contraction in IIP for October 2022 at 4.0% gravitated towards manufacturing; which is apparent considering its 77.63% weightage in the IIP basket.

What about the cumulative picture for the first 7 months of FY23 from April 2022 to October 2022? For FY23 till date, mining grew at 4.0%, manufacturing at 5.0% and electricity at 9.4%. The cumulative IIP growth for FY23 till October 2022 stands at 5.3%. Despite the pressure in the last 3 months, FY23 IIP is still in the positive zone with positive momentum.

Product basket that moved IIP in October 2022

IIP contraction of -4.0% for October 2022 reflects a sharp fall after a rather heart-warming recovery in September. Clearly the global headwinds and the consumer scepticism are still too high and are impacting demand. Here is a quick look at specific products that triggered the -4.0% contraction in IIP. Let us first focus on the positive triggers for the IIP in October 2022. Products that triggered the positive surge in IIP for October 2022 include Printing & Media (+14.6%), Motor Vehicles (+12.3%), Furniture (+6.8%), Metal Products (+6.5%), fabricated metals (+4.5%) and beverages (+2.8%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in October 2022 were Apparel (-37.1%), Electrical Equipment (-33.2%), Other Manufacturing (-31.0%), Leather Products (-24.3%), Textiles (-18.6%), tobacco products (-14.3%),  wood products (-12.7%), Computers & Electronics (-12.3%) and paper products (-8.9%). If you look at the mix of the IIP depressants, most of them are export dependent sectors. Clearly, the global uncertainty and central bank hawkishness has hit exports hardest. However, if you look at the first 7 months to October 2022, there are 5 sectors with negative cumulative growth.

How does the IIP look from a use-based perspective for October 2022? In terms of user groups, Primary Goods grew 2.0%, Capital Goods contracted -2.3%, Intermediate goods contracted -2.8% and infrastructure goods grew by 1.0%. However, the pressure came from consumer durables demand contracting by -15.3% and the demand for consumer non-durables contracting sharply by -13.4%. Recession worries raised stagflation expectations and that has hit consumer demand.

Quick look at the high frequency growth for October 2022

We can break up the -4.0% IIP contraction for September 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that gives a precise picture of short-term momentum in the IIP basket. By month on month, we refer to the sequential performance of October over September data.

Weight Segment IIP Index
Oct-21
IIP Index
Oct-22
IIP Growth
Over Oct-21
IIP Growth (HF)
Over Sep-22
0.1437 Mining 109.80 112.50 +2.46% +12.5%
0.7764 Manufacturing 136.40 128.70 -5.65% -4.53%
0.0799 Electricity 167.30 169.30 +1.20% -9.66%
1.0000 Overall IIP 135.00 129.60 -4.00% -3.28%
Data Source: MOSPI

The overall MOM high frequency growth turned negative once again to -3.28% with most of the negative vibes coming from electricity and manufacturing. Mining showed positive high frequency momentum in the month of October 2022. The negative signals in October 2022 emanate from the fact that both the yoy IIP and the MOM IIP have shown considerable worsening and that is a clear impact of the global and domestic headwinds hitting demand.

Time for RBI to do a reality check on policy stance

In its December 2022 policy, the RBI did show some restraint and hiked rates by just 35 bps rather than its normal 50 bps. Clearly, the RBI appears to have taken its cues from the US markets. However, the problems for RBI are more real in the Indian context. India has shown GDP growth of 6.3% in the second quarter giving hopes that full year growth in GDP may eventually gravitate towards the 7% mark. However, that is only possible if the cost of funds come down sharply and export demand also shows signs of green shoots.

The government and the RBI must take cues from two takeaways from the corporate results for the second quarter. Firstly, the pressure of interest costs is quite substantial in the second quarter with the average interest coverage ratio down by 1X on yoy basis. That is a direct impact of higher interest rates translating into higher cost of funds. The seamless transmission of rates to the cost of funds is also hastening the impact. The second is the huge impact that cost inflation at multiple levels is having on profits and output.

It must be said that the RBI has substantially front-loaded the rate hikes by undertaking 3 rounds of 50 bps each, before tapering to a 35 bps hike in December. However, the rate hikes total up to 225 bps since May 2022 and the repo rates are now 110 bps higher than the pre-COVID rates. For an economy that is heavily betting on over 7% GDP growth and outclassing China by 400 bps on the GDP front, high interest rates are beginning to pinch hard. One can argue that much of the pressure on the IIP front is due to global slowdown and weak exports, which are not in the control of the RBI. The best the RBI and the government can do in these conditions is to tone down the impact of what they can control; which is the cost of funds. That is the message from the IIP data.


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August 2022 IIP dips into negative as hawkishness hurts

  • India Infoline News Service
  • 13 Oct , 2022
  • 8:55 AM
The combination of global hawkishness, rising inflation risks and pressure on exports led to negative IIP growth in the month of August 2022. Of course, one argument can be that the IIP growth in August 2021 was elevated at 12.97% and the base effect should sober later on. However, August saw contraction in manufacturing output and a much deeper contraction in mining output. It was only electricity generation that managed to just about hold in the positive territory. Obviously, manufacturing with its oversized weightage in the IIP, tended to influence the final number.




Data Source: MOSPI

To be fair, there have been several headwinds that have plagued overall growth. To begin with, the Russia-Ukraine war shows no signs of relenting and that is contributing largely to the energy crisis globally. The obsession of China with zero-COVID status is hitting supply chains hard. On top of that, persistent tightening by central banks has failed to curb inflation in any significant manner. Even in the case of India, RBI has been extremely hawkish, but inflation has risen sharply even in the month of September 2022.

A quick look at recent revisions to the IIP. The IIP for June 2022 got revised up by 40 bps to 12.70% while the IIP for May 2022 was revised up 8 bps to 19.72%. Earlier, the IIP for April 2022 had been revised lower by 8 bps to 6.66%. Overall, there is not much of a concern on the revisions, except the overarching impact of the global headwinds, starting to manifest.

How does the sectoral break-up of IIP look in August 2022?

August 2022 marks the fifth month of the current fiscal year FY23 and we now have data for 5 good months. Let us start with the 3 principal components of IIP viz. mining, manufacturing and electricity for August 2022. Mining sector growth for August 2022 contracted by -3.86%, manufacturing contracted by -0.68% but Electricity grew at the rate of 1.38%; tepid but positive nevertheless. Overall contraction in IIP for August 2022 at -0.83% gravitated towards manufacturing growth, which is not surprising considering its 77.63% weightage in the IIP basket.

Let us also look at the cumulative picture for the first 5 months of FY23 from April 2022 to August 2022. For FY23 till date, mining grew at 4.2%, manufacturing at 7.9% and electricity at 10.6%. The cumulative IIP growth for FY23 till date stands at 7.7%, despite a rapidly growing base of last year. However, the momentum of IIP has surely been weakening.

Which products drove the IIP growth in August 2022

IIP contraction of -0.83% for August 2022 is surely a disappointment after 17 months of positive IIP growth. it is indicative of the larger challenges of global headwinds that are having an impact on the IIP figure. Here is a quick look at specific products that triggered the -0.83% growth in the IIP. Let us first focus on the positive triggers for the IIP in August 2022. The handful of products that triggered the positive surge in IIP for August include Furniture Manufacture (+44.4%), Recorded Media (+27.6%), Motor Vehicles & Trailers (+23.7%), Beverages (+7.2%) and Coke & Refined Petroleum (+6.6%).

Among the key items that depressed IIP growth in August 2022 were Electrical Equipment (-28.2%), Pharmaceuticals (-19.0%), Wearing Apparel (-18.3%), leather products (-15.3%), tobacco products (-13%) and textiles (-12.2%). If you look at the mix of the depressants of GDP, most of them are export dependent sectors. Clearly, the global slowdown and recession fears are playing on global demand, which is evident form the numbers. However, if you look at the first 5 months to August 2022, then only pharma and textiles have shown negative growth; once again a hint of pressure on the export front.

How does the IIP look from a use-based perspective for the month of August 2022? In terms of user groups, Primary Goods grew 1.7%, Capital Goods grew 5.5%, Intermediate goods grew 0.6% and infrastructure goods grew by 1.7%. However, the pressure came from consumer durables demand contracting by -2.5% and the demand for consumer non-durables contracting by a whopping -9.9%. The message is that the spate of hawkishness has surely hit consumer demand and that is showing in the IIP numbers.
 
You must look at the high frequency IIP story for August 2022

We can break up the -0.83% IIP contraction for August 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that gives the most precise picture of short term momentum in the IIP basket. By month on month, we refer to the index of August data over July data. This captures the short term shifts and trends much better.

Weight Segment IIP Index
Aug-21
IIP Index
Aug-22
IIP Growth
Over Aug-21
IIP Growth (HF)
Over Jul-22
0.1437 Mining 103.60 99.60 -3.86% -1.48%
0.7764 Manufacturing 131.90 131.0 -0.68% -2.89%
0.0799 Electricity 188.70 191.30 +1.38% +1.27%
1.0000 Overall IIP 132.40 131.30 -0.83% -2.31%
Data Source: MOSPI

Let us now turn to the high frequency MOM growth. The overall MOM high frequency contraction has been -2.31%. in fact, the yoy IIP came negative after a gap of 17 months so it is after a very long time that the yoy IIP number and the high frequency IIP number have come in the negative. There is clearly pressure coming from the exports front and that is what the manufacturing pressure shows. The curbs on mining exports put by India has also resulted in lower growth of output by the mining companies. If you look at the break up of the IIP product wise, the maximum pressure is coming from the export driven sectors. It is a clear indication that the pressure is predominantly coming from the global slowdown in demand as companies get more wary of the recession blues.

Is it time for RBI to look at IIP rather than inflation?

That is the million dollar question. Since March 2022, the RBI has almost been obsessed with cutting down inflation and towards that end it has already hiked rates by 190 basis points. In the forthcoming December policy also the RBI is likely to raise rates and the terminal rate target has been increased by 50 to 70 basis points, although there is no final confirmation by the RBI. Inflation did show signs of responding, but has bounced back to 7.41% in the month of September; a spike of 71 bps in just 2 months. Remember, the growth engine is the big advantage that India has and the RBI cannot afford to have that spluttering.

Going ahead, we reiterate that the IIP number could start mattering a lot more and the RBI would be wary of any sharp fall in high frequency IIP. For the first time in 17 months, yoy IIP has turned negative. The RBI has been aggressive and front-loaded rate hikes so that in future it can adopt course correction. From the December 2022 policy, the IIP could once again start to matter to the RBI policy stance. It may be the right choice too!

September 2022 IIP bounces back to positive at 3.09%

  • India Infoline News Service
  • 12 Nov , 2022
  • 11:31 PM
The latest IIP figure for September 2022 (IIP is announced with 1-month lag) marked a sharp bounce back in the IIP figure into positive territory to 3.09%. In August 2022, the initial IIP reporting had been at (-0.83%); the first negative IIP figure after 17 consecutive months of positive IIP. That was not a very elevating feeling, but the bounce in September has largely alleviated that concern. Global hawkishness, rising inflation and pressure on exports led to negative IIP growth in August 2022.

In our previous report, we had stated that the negative growth in August was largely due to the elevated base of 12.97% in August 2021. In comparison, the base for September 2021 was more mellowed at 4.35%, allowing the September 2022 IIP to bounce back into positive zone. In September 2022, growth was positive across mining, manufacturing and electricity, although it was electricity that showed the big positive thrust. Obviously, manufacturing with its oversized weightage in the IIP, influenced the final IIP number the most.


Data Source: MOSPI

To be fair, several headwinds plagued overall growth. Evan as the Russia-Ukraine war shows no signs of relenting, it created a global energy crisis. December 2022 is when the EU sanctions kick in and that would be critical to the energy equations. China stays obsessed with zero-COVID status and that is hitting supply chains hard. It is not just the Fed, but even ECB and BOE are persistently tightening rates to curb inflation. Even in the case of India, RBI has been extremely hawkish, but inflation continues to remain elevated at over 7%.

Let us take a quick look at recent revisions to IIP. The IIP for June 2022 had undergone a 40 bps positive first revision from 12.30% to 12.70%. The final revision of June 2022 has pegged the figure at 12.62%. The preliminary estimates for August 2022 have been raised from (-0.83%) to (-0.68%). Despite short term pressures, revisions are encouraging.

Sneak peek at the sectoral break-up of IIP for September 2022?

September 2022 marks the sixth month of fiscal year FY23 and we now have data for 6 full months. Let us start with the 3 principal components of IIP viz. mining, manufacturing and electricity for September 2022. Mining growth for September 2022 was 4.63%, manufacturing expanded by 1.82% while Electricity grew at a healthy clip of 11.61%. Overall expansion in IIP for September 2022 at 3.09% gravitated towards manufacturing growth, which is not surprising considering its 77.63% weightage in the IIP basket.

Let us also look at the cumulative picture for the first 6 months of FY23 from April 2022 to September 2022. For FY23 till date, mining grew at 4.2%, manufacturing at 6.8% and electricity at 10.8%. The cumulative IIP growth for FY23 till date stands at 7.0%, despite a rapidly growing base of the previous year. The good news is momentum is favourable.

Which products drove IIP growth in September 2022

IIP growth of 3.09% for September 2022 reflects a sharp bounce from the contraction of August 2022. It shows a picture of resilience of the Indian economy, even amidst such strong headwinds. Here is a quick look at specific products that triggered the 3.09% growth in the IIP. Let us first focus on the positive triggers for the IIP in September 2022. Products that triggered the positive surge in IIP for September 2022 include Furniture (+35.3%), Motor Vehicles (+29.9%), Recorded Media (+29.3%), Transport Equipment (+14.8%), Beverages (+12.1%), Coke & Refined Petroleum (+9.8%) and Mineral Products (+9.3%).

Among the key items that depressed IIP growth in September 2022 were Electrical Equipment (-31.4%), Wearing Apparel (-21.7%), Pharmaceuticals (-17.2%), leather products (-16.0%), textiles (-12.0%) and wood products (-3.8%). If you look at the mix of the depressants of GDP, most of them are export dependent sectors. It is no rocket science that global slowdown and recession fears have depressed export demand. However, if you look at the first 6 months to September 2022, only pharma and electrical equipment have take a sharp hit, while the fall in textiles and leather is more mellowed.

How does the IIP look from a use-based perspective for September 2022? In terms of user groups, Primary Goods grew 9.3%, Capital Goods grew 10.3%, Intermediate goods grew 2.0% and infrastructure goods grew by 7.4%. However, the pressure came from consumer durables demand contracting by -4.5% and the demand for consumer non-durables contracting by a sharper -7.1%. The recession worries have raised stagflation expectations and hit consumer demand.

High frequency IIP growth turns positive in September 2022

We can break up the 3.09% IIP growth for September 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that gives the most precise picture of short-term momentum in the IIP basket. By month on month, we refer to the index of September data over August data.

Weight Segment IIP Index
Sep-21
IIP Index
Sep-22
IIP Growth
Over Sep-21
IIP Growth (HF)
Over Aug-22
0.1437 Mining 95.10 99.50 +4.63% -0.10%
0.7764 Manufacturing 131.90 134.30 +1.82% +2.28%
0.0799 Electricity 167.90 187.40 +11.61 -2.04%
1.0000 Overall IIP 129.50 133.50 +3.09% +1.52%
Data Source: MOSPI

Let us now turn to the high frequency MOM growth. The overall MOM high frequency growth also turned around to a positive figure of +1.52% with most of the positive vibes coming from manufacturing followed by neutral vibes from mining. However, the pressure point was electricity, which remained under pressure on a high frequency basis. If you look at the break-up of product wise IIP, the short term high frequency pressure is coming from the electricity sector. The high frequency positive growth in IIP is an indication that the worst of the pressure from global headwinds may be abating.

Is it time for RBI to bring back its growth obsession?

That is the big question that we need to address. Since March 2022, RBI has almost been obsessed with cutting down inflation and it has already hiked rates by 190 basis points. In the forthcoming December policy also the RBI is likely to raise rates and the terminal rate target has been increased by 50 to 70 basis points; and India may end up well above 5% in terms of repo rates.

Inflation did show signs of responding, but has bounced back to 7.41% in the month of September; a spike of 71 bps in just 2 months. However, the good news is that the wholesale inflation (WPI) has been falling rather sharply and that is a reasonable lead indicator of the shape of consumer inflation (CPI) in the coming months. With the US inflation falling sharply to 7.7% in October 2022 and India CPI inflation awaited on Monday, the time may be ripe for the RBI to shift its focus back to growth.

Is the Indian economy under strain? For that you don’t look at the IIP or GDP numbers but at the number of IT companies and digital players laying off in large numbers. Going ahead, the IIP number should start mattering a lot more and the RBI would be wary of any sharp fall in high frequency IIP. The good news is that the IIP has turned positive after just a brief blip in August 2022. The RBI has been aggressive and front-loaded substantial rate hikes so that in future it can adopt course correction. From the December 2022 policy, the IIP could once again start to matter to the RBI policy stance.

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  • 13 October, 2022 |
  • 12:10 PM

The latest IIP figure for August 2022 (IIP is announced with 1-month lag) marked the first negative IIP figure (-0.83%) after 17 consecutive months of positive IIP growth.

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