IIP Growth (HF)
It has sharply turned around from -4.22% in October 2022 to +7.11% in November 2022. In August 2022, the IIP reporting had been at (-0.68%); the first negative IIP figure after 17 consecutive months of positive IIP. However, after IIP bounced back in September into positive, the IIP had once again dipped into negative zone in October. There was a sense of disappointment with 2 negative IIPs in 3 months, but November data should come as a welcome relief.
Normally, each month, the previous month’s IIP goes through the first revision while the 3-month old IIP goes through a final revision. In the latest month, there is no final revision of the August 2022 IIP of -0.68%. However, the first revision of October 2022 IIP has pegged it 22 bps lower at -4.22%. The pressure on the IIP in October clearly was an outcome of too much hawkishness, rampant inflation and supply chain constraints.
The turnaround in the IIP growth can be partially attributed to the base effect. Between October 2021 and November 2021, the IIP growth had come down from 4.17% to 1.02%. This sharp fall in the base effect was one factor contributing to the improved IIP number in November 2022. However, that is not to take away from the fact that more optimism in the economy and hopes of rates peaking in first half of 2023 have helped output.
Despite the turnaround, we must be conscious of the plethora of global headwinds. For instance, the Ukraine war is threatening to create a full blown energy crisis and there will be more clarity when the diesel flows from Russia into EU dry up in 23 days. There are fears of a distinct slowdown in the US, UK and the EU and that is negatively impacting customers and corporates; hitting demand and exports. The two big events to watch out are the Union Budget on the 01st of February and the monetary policy after that. That could set the tone.
IIP sectoral break-up for the month of November 2022
November 2022 marks the 8th month of FY23. Hence the cumulative number is as relevant as the monthly numbers, but let us start with the 3 principal components of IIP in November 2022 first. Mining growth for November 2022 was 9.75%, manufacturing grew by 6.05% while Electricity grew at 12.71%. Overall growth in IIP for November 2022 at +7.11% was a sharp turnaround from the negative lows of October, when IIP had dipped by -4.22%.
Here is a quick look at the cumulative picture for the first 8 months of FY23 from April 2022 to November 2022? For FY23 till date, mining grew at 4.7%, manufacturing at 5.0% and electricity at 9.8%. The cumulative IIP growth for FY23 till November 2022 stands at 5.5%. The cumulative IIP is almost flat compared to October 2022. IIP has gravitated towards manufacturing; which is obvious considering its 77.63% weightage in the IIP basket.
How the product basket moved IIP in November 2022
IIP growth of +7.11% for November 2022 reflects a sharp turnaround after the lows of October. One thing is apparent from the IIP data that there is internal optimism about the Indian economy and that is boosting output and inventory build-up. Let us first focus on the positive triggers for the IIP in November 2022. Products that triggered the positive surge in IIP for November 2022 include Transport Equipment (+24.0%), Motor Vehicles (+22.2%), Printing and Media (+22.1%), Machinery & equipment (+20.8%), Non-metallic minerals (+19.8%), Furniture (+15.7%), food products (+9.9%) and beverages (+8.2%).
Now for the IIP depressants. Among the key items that pulled down IIP growth in November 2022 were Apparel (-11.7%), Textiles (-9.0%), tobacco products (-5%) and leather products (-2.0%). 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 had a sharp impact on exports. However, if you look at the cumulative IIP for first 8 months to November 2022, there are only 4 sectors with negative cumulative growth, so the data is still good.
How does the high frequency data appear in November 2022?
We can break up the 7.11% IIP growth for November 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 November over October data.
IIP Growth (HF)
Data Source: MOSPI
That appears to be a lot of positive vibes on the IIP front in November. Not only is yoy IIP smartly higher, but even sequential MOM IIP is up 6.03%. The good news is the sharply positive short term vibes from mining and manufacturing, although electricity was in the negative in terms of high frequency growth. The data for November is exactly the reverse of October. The only question is whether this enthusiasm and euphoria can really sustain?
How much hawkish will the RBI be?
In its December 2022 policy, RBI restricted hawkishness to just 35 bps instead of its usual 50 bps. It almost appeared to be taking a cue from the US markets. The first advance estimate of GDP for FY23 that was released on 07th January 2023, has pegged full year GDP growth at 7.0%. That means; India will be the fastest growing large economy globally. However, this puts the RBI in a fix. It needs to still hike rates to curb inflation, but sustained growth also needs reasonable cost of funds.
In the last two MPC meets, the debate was getting split. Members like Ashima Goyal and Jayanth Varma are veering towards a less hawkish stance. They want RBI to go slow on rate hikes now. However, the other four members are still tilting towards hawkishness so that the last vestiges of excess inflation are eliminated. It is a tough choice, but the RBI may pause in February and then effect another 50 bps rate hike before topping out. The real challenge here is to ensure that in the enthusiasm to curb inflation, growth is not curbed.
RBI has already substantially front-loaded rate hikes; pushing up repo rates by 225 bps since May 2022. Rates are now 110 bps above the pre-COVID rate and almost at the neutral rate, beyond which the impact on growth would be visible. The best the RBI and the government can do is to tone down the impact of what they can control; which is the cost of funds. The current approach is not conducive to a full-fledged macroeconomic recovery.
IIP Growth (HF)
The latest IIP figure for November 2022 (IIP is announced with 1-month lag) marked a sharp turnaround in factory output growth.
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