May 2022 IIP bounces to 19.64% on manufacturing boost

13 Jul 2022 , 11:42 AM

After hovering around the median 2.25% mark for 5 months between November 2021 and March 2022, the IIP number jumped to 6.74% in April 2022 and further to 19.64% in May 2022. What is gratifying about the IIP growth is that the 19.64% growth in May 2022 comes on a robust growth base of 27.61% in May 2021. However, that was because of a deeply negative IIP growth in May 2020, so on a 3 year basis, the IIP may be just about coming back to pre-COVID levels.

Data Source: MOSPI

The last 13 months of IIP data can be split into 3 distinct phases. The first phase between April 2021 and August 2021, was double digit IIP growth largely on the back of a low pandemic base. Between September 2021 and March 2022, the IIP has hovered around the median rate of 2.25%. The third phase has started from April 2022 onwards, wherein the growth has again bounced back despite a solid base month. Whether, this is a 2-year base impact or genuine recovery in growth will only be evident in the next few months.

How does sectoral break-up of May 2022 IIP sound?

May 2022 is the second month of the current fiscal year FY23. A cumulative picture may at best be sketchy, but we shall still briefly look at that picture. But, let us first look at the three components of IIP viz. mining, manufacturing and electricity for May 2022. Mining sector growth for May 2022 came in at 10.90%, manufacturing at 20.63% and Electricity grew at an impressive 23.47%. While Electricity led the IIP story, the thrust came from manufacturing growth at 20.63%, especially considering its weightage of 77.63% in the IIP basket. Let us quickly look at the cumulative Apr-May numbers too. For FY23 till date, mining grew at 9.4%, manufacturing at 12.8% and electricity at 17.4%. The cumulative overall IIP growth for FY23 till date stands at an impressive 12.9%, albeit on a lower 2-year base.

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 April 2022 was lowered by 40 bps from 7.14% to 6.74%. Similarly, the final revised estimate for February 2022 was lowered by 31 bps from 1.46% to 1.11%. One reason for this lowering could be the impact of the various domestic and global headwinds.

Key drivers of IIP growth in May 2022

IIP growth of 19.64% for May 2022 is surely an impressive number. Here is a quick look at which specific products drove the IIP. Let us first focus on the IIP depressants. There was just one product that saw negative IIP growth in May 2022 and that was pharma & botanical products which saw de-growth of -13.1% in May 2022. Among the positive contributors were transport equipment at +129%, beverages at +128%, motor vehicles at +88.7%, apparel at +69.9%, furniture at +68.7%, electrical equipment +59.6%, wood products at +56.1%, leather products at +48.9% and machinery at +38.8%.

How does it look when you look at IIP from a use-based perspective? In terms of user groups, consumer durables grew 58.5% and capital goods at 54%. Among other user groups, the infrastructure segment grew 18.2%, intermediate goods at 17.9% and primary goods at 17.7%. However, consumer non-durables continued to show flat to tepid growth at just 0.9% for the month of May 2022 while the cumulative growth for FY23 was just 0.1%.

A quick look at the high frequency IIP numbers

We can break up the 19.64% IIP growth for May 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that really gives you a picture of the short term momentum in the IIP basket.

Weight	Segment	IIP Index May-21	IIP Index May-22	IIP Growth Over May-21	IIP Growth (HF) Over Apr-22
0.1437	Mining	108.30	120.10	+10.90%	+3.36%
0.7764	Manufacturing	111.50	134.50	+20.63%	+2.05%
0.0799	Electricity	161.90	199.90	+23.47%	+2.78%
1.0000	Overall IIP	115.10	137.70	+19.64%	+2.30%

Data Source: MOSPI

There is not much of debate on the yoy numbers. IIP has grown decisively over May 2021 across mining, manufacturing and electricity. One can argue that the base of May 2020 was very low so even after 2 years of positive growth, the overall impact is almost neutral. That is technically correct, but that does not take away from the strength of the recovery. But, a clearer picture emerges from the high frequency month-on-month numbers and not from the yoy numbers. Let us turn to the high frequency numbers now.

Unlike April 2022, when high frequency IIP numbers were under a lot of pressure, May has seen positive growth in the high frequency IIP too. If you look at the table above, there is positive traction across the 3 segments of IIP on a month-on-month basis and that is indicative of the fact that the short term momentum is also favouring positive IIP growth, apart from the long term trend. The MOM growth picture shows mining +3.36%, manufacturing +2.05% and electricity +2.78%. Overall MOM IIP growth at 2.30% is in stark contrast to the negative high frequency IIP de-growth manifested in April 2022. What is also appreciable is that, this performance is despite global and domestic headwinds.

How much will the IIP data impact RBI monetary stance?

Since March 2022, the RBI tune has been about controlling inflation above all else. For now, the inflation continues to stay above 7% and that is the worry. Hence, the impact of the IIP number on the RBI monetary stance would be minimal. The central bank would be more worried about the fact that inflation is nearly 300 bps above the preferred median. The positive cues coming from the IIP front is good news for the RBI as it assures the central banks that the Indian economy has the resilience to handle a more hawkish monetary policy without compromising on industrial growth.

Global monetary policy is entering an interesting phase. There is likely to be an increasingly bitter battle between curbing inflation and avoiding an all-out recession. The US yield curve is already inverted and could make the Fed more cautious. For the August policy, one can expect another rate hike from the RBI. Beyond that, it would be purely data driven.