September 2022 IIP bounces back to positive at 3.09%

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.