Apr-24 IIP at 4.98%, as manufacturing slows due to higher base

14 Jun 2024 , 11:25 AM

HIGHER BASE TAKES ITS TOLL ON IIP APR-24 GROWTH

April 2024, once again, saw a rather mixed show in terms of the IIP growth. To be fair, the base moved up from 1.95% to 4.61% in the year-ago period. Hence, the flat IIP growth was totally understandable. However, the previous month’s IIP has been sharply revised upwards, so the current April 2024 IIP is sharply lower than the March 2024 IIP. Remember, IIP is always reported with a lag of one-month. The month saw an improvement in mining and electricity output, but manufacturing output took a knock on account of the higher base and that kept the IIP growth in check.

Let us quickly turn to the IIP revisions. Typically, the IIP growth goes through 2 revisions; the final revision after 3 months and the preliminary revision after 1 month. The month saw the release of final revision for the month of January 2024, wherein the overall IIP growth got upgraded by 7 basis points from 4.14% to 4.21%. At the same time, the first revision for March 2024 saw the IIP figure a sharper upgrade by 47 basis points from 4.94% to 5.41%. Overall, the shifts were positive and that does give some insights into how the future revisions of April 2024 IIP could be. The revision are important as they cover more data points and also adjust for granular categories data coming in.

HIGH FREQUENCY IIP GROWTH NEGATIVE IN APRIL 2024

The regular IIP growth that we see is yoy growth; compared to the year-ago period. However, the yoy number is too vulnerable to the base effect and does not capture the short term eccentricities of IIP data. That gap is filled by MOM high frequency IIP data. How does that look for April 2024? Unlike in March, in April, the high frequency growth across mining and manufacturing was negative while only electricity had positive IIP growth. That is broadly stressful. For the month of April 2024, the high frequency mining IIP was -16.26% lower and the high frequency manufacturing IIP was also down -7.56%. However, electricity bucked the trend; as it showed MOM growth of 3.82%. The pressure on manufacturing means that the end result gravitated towards manufacturing, due to its weight. Thus, the overall MOM (high frequency) IIP reading for April 2024 sharply down  MOM by -7.63%. The MOM numbers have disappointed, especially within mining and manufacturing.

MINING, MANUFACTURING, ELECTRICITY – HOW THE MEDLEY LOOKED

In the last 3 months, the trend in mining, manufacturing, and electricity have been oscillating. For example, in January 2024, it was manufacturing growth that was relatively tepid, while mining and electricity showed robust growth. In February 2024, all 3 showed sharply better levels compared to the previous month. However, in March 2024, Manufacturing and Electricity growth was robust, while mining output fell sharply.

Let us start with mining IIP for April 2024 on yoy basis. The April 2024 mining IIP growth was strong at just 6.7%, compared to just 1.3% in March 2024. If you look at electricity IIP, it stood at 10.2% in April 2024, compared to 8.6% in March 2024. The positive trend could not be sustained by manufacturing, which saw IIP growth in April 2024 taper to 3.9% compared to just 5.8% in March 2024. As a result, the overall IIP for April 2024 at 5.0% was lower than the revised IIP reading of 5.4% for March 2024. Manufacturing proved to be major drag on IIP in April 2024.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

Despite the base IIP number between March 2023 and April 2023 shifting sharply higher from 1.95% to 4.61%; the yoy IIP in April is only marginally lower; and that too because the previous data has been revised upwards. This is partially attributed to election related weakness in key output stacks.

Month	IIP Growth (%)
Mar-23	1.95%
Apr-23	4.61%
May-23	5.66%
Jun-23	4.05%
Jul-23	6.18%
Aug-23	10.87%
Sep-23	6.35%
Oct-23	11.89%
Nov-23	2.47%
Dec-23	4.39%
Jan-24	4.21%
Feb-24	5.60%
Mar-24	5.41%
Apr-24	4.98%

Data Source: MOSPI

There are 2 positive takeaways from the latest IIP data. Firstly, the Red Sea crisis and the disruption of trade routes, is seeing diminishing impact on IIP. That is good news and it is also not surprising since India continues to be an inward looking economy. However, it must be mentioned that it is the export basket that is pressuring the IIP number this year. The other positive takeaway is the gradual revival in rural demand. Many Indian companies have proactively tweaked packaging sizes to keep rural consumers happy with lower unit sizes. The outcome is that the Indian rural consumer is back with shopping bags. Rural growth could be the X-factor going ahead.

APRIL 2024 IIP BASKET: MANUFACTURING HOLDS BACK IIP GROWTH

The table captures comparative IIP growth for last 4 months, with respective component weights. Cumulative numbers for mining, manufacturing, and electricity are segregated.

Product Basket	Weights	Jan-24	Feb-24	Mar-24	Apr-24
Manufacture of food products	5.3025	0.6	2.9	-3.2	-12.7
Manufacture of beverages	1.0354	8.0	14.9	0.6	11.7
Manufacture of tobacco products	0.7985	-8.4	-0.5	-17.9	-8.9
Manufacture of textiles	3.2913	1.7	3.6	-3.4	0.3
Manufacture of wearing apparel	1.3225	-2.3	-2.9	7.6	12.6
Manufacture of leather and related products	0.5021	0.5	1.7	-9.7	-8.6
Manufacture of wood products	0.1930	3.4	7.0	3.1	-5.5
Manufacture of paper products	0.8724	-6.2	4.7	0.1	-4.0
Printing and reproduction of recorded media	0.6798	3.2	6.0	0.7	-5.4
Manufacture of coke and refined petroleum products	11.7749	-2.1	4.1	0.9	4.9
Manufacture of chemical products	7.8730	-2.0	1.6	0.2	0.0
Manufacture of pharmaceuticals	4.9810	0.7	-10.6	17.2	3.1
Manufacture of rubber and plastics products	2.4222	7.1	12.6	6.0	3.2
Manufacture of other non-metallic mineral products	4.0853	3.0	8.8	8.2	1.7
Manufacture of basic metals	12.8043	7.6	9.1	8.5	8.1
Manufacture of fabricated metal products	2.6549	16.8	14.3	20.3	10.2
Manufacture of computer, electronic and optical products	1.5704	-7.6	1.9	0.4	3.9
Manufacture of electrical equipment	2.9983	2.6	9.8	14.4	3.3
Manufacture of machinery and equipment	4.7653	3.0	3.7	2.7	1.0
Manufacture of motor vehicles, trailers, and semi-trailers	4.8573	18.9	11.6	6.5	11.4
Manufacture of other transport equipment	1.7763	25.3	24.4	26.2	17.4
Manufacture of furniture	0.1311	15.0	22.7	32.1	38.4
Other manufacturing	0.9415	-6.7	-6.5	-17.1	10.7
MINING	14.3725	6.0	8.1	1.3	6.7
MANUFACTURING	77.6332	3.6	4.9	5.8	3.9
ELECTRICITY	7.9943	5.6	7.5	8.6	10.2
OVERALL IIP	100.0000	4.2	5.6	5.4	5.0

Data Source: MOSPI

The last column shows the most current IIP reading for April 2024. IIP numbers are reported with a lag of 1 month. Here are the key takeaways.

• The IIP growth of 5.0% in April 2024, is lower than the revised 5.4% in March 2024. However, April is on a much higher base and is prior to revisions. That means, manufacturing has put pressure on the IIP, even as mining and electricity did better. The overall IIP obviously gravitated towards the manufacturing growth, considering its 77.6% weightage in the IIP basket.
• In the month of April 2024, the products that saw the highest positive growth were furniture, transport equipment, wearing apparel, beverages, motor vehicles / trailers, fabricated metal products, base metals, refined petroleum, and electronics. These are largely domestic demand triggered; although apparel and electronics have a strong export component too. The products that saw the sharpest fall in IIP include food products, tobacco products, leather products, wood products, printing / recorded media, and paper products. Apart from weak demand, the exports are also being hit by the Red Sea crisis and that is slowing this segment.

In April 2024, it was manufacturing that came under stress and that could be partially attributed to the uncertainty surrounding elections. Hopefully, that should not get rectified.

READING BETWEEN THE LINES OF ANNUALIZED DATA

The latest fiscal year FY25 is just the one month of April, so cumulative numbers will correspond with the monthly numbers. The cumulative IIP growth for FY24 at 6.0% was better than FY23 at 5.5%. However, FY22 may not be comparable due to the low base of the previous year resulting in a COVID driven rally in the IIP growth.

Product Basket	Weights	2021-22	2022-23	2023-24	2024-25
Manufacture of food products	5.3025	5.9	3.8	1.7	-12.7
Manufacture of beverages	1.0354	11.5	23.9	5.7	11.7
Manufacture of tobacco products	0.7985	8.7	1.4	-7.5	-8.9
Manufacture of textiles	3.2913	29.3	-8.4	0.2	0.3
Manufacture of wearing apparel	1.3225	27.4	0.2	-13.8	12.6
Manufacture of leather and related products	0.5021	1.3	-3.9	-0.6	-8.6
Manufacture of wood products	0.1930	15.1	1.1	-5.6	-5.5
Manufacture of paper and paper products	0.8724	17.7	0.8	-3.5	-4.0
Printing and reproduction of recorded media	0.6798	12.4	24.5	-1.0	-5.4
Manufacture of coke and refined petroleum	11.7749	8.9	6.1	4.0	4.9
Manufacture of chemicals and chemical products	7.8730	4.3	7.1	-1.6	0.0
Manufacture of pharmaceuticals	4.9810	1.3	-2.0	9.0	3.1
Manufacture of rubber and plastics products	2.4222	8.0	0.7	4.5	3.2
Manufacture of other non-metallic mineral products	4.0853	20.1	7.2	6.7	1.7
Manufacture of basic metals	12.8043	18.6	8.1	11.7	8.1
Manufacture of fabricated metal products	2.6549	10.9	-0.5	8.4	10.2
Manufacture of computer, electronic and optical	1.5704	11.1	-2.8	-10.5	3.9
Manufacture of electrical equipment	2.9983	12.2	0.9	7.8	3.3
Manufacture of machinery and equipment	4.7653	11.0	11.3	6.8	1.0
Manufacture of motor vehicles and trailers	4.8573	18.4	22.1	11.6	11.4
Manufacture of other transport equipment	1.7763	1.6	17.5	14.5	17.4
Manufacture of furniture	0.1311	23.3	21.0	-5.9	38.4
Other manufacturing	0.9415	49.0	-0.7	-5.5	10.7
MINING	14.3725	12.2	5.7	7.9	6.7
MANUFACTURING	77.6332	11.8	5.0	5.5	3.9
ELECTRICITY	7.9943	7.9	9.2	7.2	10.2
OVERALL IIP	100.0000	11.4	5.5	6.0	5.0

Data Source: MOSPI (FY25 is for just one month)

The last column refers to data for FY25; but then it is for just one month, so it corresponds with the month data that we already discussed about. There is only one month data so it is tough to compare with the previous years. However, FY24 IIP growth has been about 50 bps higher than the FY23 IIP growth and that is good news. The second positive takeaway is that if you look at the list of sectors among leaders and laggards; then some of the sectors like electronics and apparels are seeing a revival in demand. This is largely on account of the very aggressive implementation of the PLI (production linked incentive) scheme that has helped boost the exports of these sectors despite global challenges and headwinds. What is interesting is that the IIP data has been robust despite the Red Sea crisis. This can be attributed to the trickle-down effect of the PLI schemes and revival of capital investment cycle. A lot will now predicate on the final budget to be presented by the government in mid-July 2024; and let us not forget that this will be a coalition budget and not a typical majority budget like in the last 10 years.

CAN THE IIP DATA JUSTIFY RBI RATE CUTS?

Central banks always keep price stability as their preamble and growth only comes as a secondary consideration in rate decisions. However, the RBI is in a unique position. It presides over an economy that has been the fastest growing large economy for 3 years in a row. Hence, the RBI is as sensitive to growth, as it is to inflation when taking rate decisions. For instance, the decision to halt rate cuts in February 2023 was taken keeping in mind the pressure of higher rates. However, the time may have finally come, when the RBI needs to move on cutting rates. While the overall GDP growth has been robust in the range of 7-8% in the last 3 years, a boost to manufacturing IIP needs more than just incentive schemes. They need access to low cost funds and that can only be provided if the RBI cuts rates.

At a macro level, there are 2 compelling factors justifying pre-emptive rate cut by the RBI. Firstly, the real rates (interest rates net of inflation) around 2.25%, against a median figure of between 1% and 1.5%. Secondly, at 6.5%, the repo rates are 135 bps above the pre-COVID rate of 5.15%. With the elections over and the new government taking office, the action now shifts to what the RBI can do on its part. While the government is a coalition, it is a stable coalition and rate cuts could be the much needed boost to the Indian companies looking for reduction in funding costs. That, by itself, can trigger pre-emptive rate cuts by the RBI; possibly even as early as the August 2024 policy.