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June 2022 IIP tapers to 12.3% as manufacturing slows

The latest IIP figure for June 2022 (IIP is announced with 1-month lag) marked the 16th consecutive month of positive growth in the index of industrial production (IIP).

August 15, 2022 11:27 IST | India Infoline News Service
After hovering around an average of 2.25% between November 2021 and March 2022, the IIP number jumped to 6.74% in April 2022 and further to 19.64% in May 2022. However, in the month of June, the IIP tapered to 12.3% as manufacturing and mining tapered on the back of lower output amidst supply chain constraints. However, what is gratifying about the June 2022 IIP growth of 12.3% is that it comes on a strong base of 13.81% growth in June 2021.



Data Source: MOSPI

It must be remembered that the IIP growth is yet to fully get over the COVID impact. In fact, there have been a series of headwinds over the last 30 months. First there was COVID-1, then there was COVID-2 and later Omicron. This was followed by the Russia-Ukraine war, the resultant supply chain constraints and persistent monetary tightening by the world’s leading central banks including the US Fed, the Bank of England, the European Central Bank and even India’s own RBI. Hence over a 3 year period, the IIP growth would still be under strain.

However, the IIP appears to be on a positive growth trajectory now.

Let us also turn to the IIP revisions for the previous months. When it comes to IIP, the monthly numbers go through two revisions; the first revised estimate after 1 month and the final revised estimate after 3 months. The first revised IIP estimate for May 2022 was maintained at a level of 19.64%. However, the final revised estimates of IIP growth for March 2022 was revised sharply higher from 2.20% to 3.76%. This is a positive signal.

Getting a hang of the sectoral break-up of June 2022 IIP growth

June 2022 marks the third month of the current fiscal year FY23 and we now have data for a quarter. Let us begin with the three components of IIP viz. mining, manufacturing and electricity for June 2022. Mining sector growth for June 2022 came in at 7.49%, manufacturing at 12.46% and Electricity grew at an impressive 16.44%. Across the spectrum, there was tapering of growth in mining, manufacturing and electricity compared to May 2022. Not surprisingly, the overall IIP growth for June 2022 once again gravitated towards manufacturing growth at 12.46%, considering its weightage of 77.63% in the IIP basket.

Let us also look at the cumulative first quarter picture for the period from April 2022 to June 2022. For FY23 till date, mining grew at 9.0%, manufacturing at 12.7% and electricity at 17.1%. The cumulative IIP growth for FY23 till date stands at an impressive 12.7%, despite a rapidly growing base of last year.

Which products drove the IIP growth in June 2022

IIP growth of 12.3% for June 2022 is surely an impressive number, albeit lower than the May figure. Here is a quick look at specific products that triggered the 12.3% growth in the IIP. Let us first focus on the IIP depressants. There were 2 products that saw negative IIP growth in June 2022. Pharma & botanical products saw de-growth of -4.1% while the manufacture of textiles saw de-growth of -3% in June 2022.

Among the key positive contributors in the month of June 2022 were Tobacco products at +52.8%, beverages at +44.8%, manufacture of computers and electronics at +44%, recorded media at +43.1%, apparel at +32%, motor vehicles +31.2%, transport equipment at +30.2% and furniture at +27.7%. However, if you look at the first 3 months to June 2022, then only pharma showed negative growth while positive thrust was led by the beverages category.

How does the IIP look from a use-based perspective? In terms of user groups, capital goods grew 26.1% and consumer durables at 23.8%. Among other user groups, infrastructure grew 8.0%, intermediate goods at 11.0% and primary goods at 13.1%. However, consumer non-durables continued to show tepid growth at just 2.9% for the month of June 2022.

Don’t miss the IIP high frequency story for June 2022

We can break up the 12.3% IIP growth for June 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.
 
Weight Segment IIP Index
Jun-21
IIP Index
Jun-22
IIP Growth
Over Jun-21
IIP Growth (HF)
Over May-22
0.1437 Mining 105.50 113.40 +7.49% -5.81%
0.7764 Manufacturing 121.20 136.30 +12.46% +1.34%
0.0799 Electricity 169.10 196.90 +16.44% -1.50%
1.0000 Overall IIP 122.80 137.90 +12.30% +0.15%

Data Source: MOSPI

There is not much of questioning on the yoy numbers, although it may have slowed compared to May 202. IIP for June 2022 has grown decisively over June 2021 by 12.3% and it is across mining, manufacturing and electricity. This growth has been achieved on a fairly high base, so that is growth on its own merit. For the month of June 2022, there has been tapering in growth in mining, manufacturing and electricity and that is reflected in the overall lower IIP growth for June 2022 compared to May 2022. However, that does not take away from the underlying strength shown by the IIP numbers.

Let us now turn to the high frequency MOM growth. The MOM growth was decisively positive in the month of May 2022 but almost flat, growing at just +0.15% in June 2022. What is actually gratifying is that the overall high frequency IIP has been positive despite mining and electricity seeing negative growth over May 2022. Manufacturing with the highest 77.6% weightage showed positive MOM growth. The MOM growth picture shows mining -5.81%, manufacturing +1.34% and electricity -1.50%. Overall MOM IIP growth at +0.15% is much lower than the 2.30% MOM growth in May 2022, but surely better than negative MOM growth in April 2022.

Now IIP will hold the key to future RBI policy

Since March 2022, the RBI has almost been obsessed with cutting down inflation and towards that end it has already hiked rates by 140 basis points. However, the inflation has also come down in response from 7.79% to 6.71% over the last two months. That is positive and shows that RBI hawkishness is working. Already, the US Fed has given hints that they may go slow on rate hikes as they do not want to hamper the growth engine. Remember, the growth engine is the big advantage that India has, so the story is the same here also.

Going ahead, the IIP number could start mattering and the RBI would be wary of any sharp fall in high frequency IIP. The RBI has been aggressive and front-loaded rate hikes so that in future it can adopt course correction. if required. From the October 2022 policy, the IIP could once again start to matter to the RBI policy stance. That is the good news!

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