August 2023 IIP surges to 10.3%, best since June 2022

13 Oct 2023 , 10:00 AM

IIP growth for August 2023 surged sharply to 10.3%, the highest level of IIP growth since June 2022. However, it must be remembered that June 2022 was a month of elevated IIP due to a weak base. In a sense, there was an advantage for IIP since August 2022 had seen negative IIP growth, so the base was low. However, the momentum of the last few months shows that is it more about manufacturing momentum and less about just the base effect. 

While mining and electricity also did substantially better than the previous month, it was manufacturing that bounced 5.0% to 9.3%. That magnified the impact on IIP, since manufacturing has a weight of 77.63% in the overall IIP basket. It must be remembered here that IIP is reported with a lag of one month; which means the August 2023 IIP growth just got reported in the middle of October 2023. Let us first look at the IIP figure on a month-wise basis for the last one year. These are all yoy growth numbers.

IIP growth shows a sharp surge in August 2023

The table captures the monthly IIP growth number captured on a yoy basis. The base effect did play a key role in the IIP improving in August 2023.

Month	IIP Growth (%)
Aug-22	-0.68%
Sep-22	3.32%
Oct-22	-4.07%
Nov-22	7.58%
Dec-22	4.68%
Jan-23	5.17%
Feb-23	6.01%
Mar-23	1.90%
Apr-23	4.61%
May-23	5.66%
Jun-23	3.76%
Jul-23	6.03%
Aug-23	10.34%

Data Source: MOSPI

The base of August 2022 showed negative IIP growth, so that base is helping the IIP for August 2023 look a lot better. However, even if you put that aside for now, the impact of the growth momentum cannot be underestimated. One indication of the growth momentum is the way previous data gets revised. 

The IIP numbers typically go through two rounds of revisions. A month after the IIP announcement it goes through the first revision and 3 months later it goes through the final revision. The May 2023 IIP has undergone a final upward revision of 40 basis points from 5.3% to 5.7%. At the same time the July 2023 IIP has also undergone the first upward revision of 30 basis points from 5.7% to 6.0%. Upward revisions are positive since they give the hope that even the latest August IIP can be revised upwards. But, let us now turn to the break-up of the IIP growth for August 2023 with a 3-month comparison.

August 2023 IIP growth across mining, manufacturing, and electricity

IIP is normally a basket of products but it is broadly classified into 3 buckets, viz. mining, manufacturing, and electricity. The table below captures the gist of the August 2023 IIP growth and compares with the previous 3 months. Here is the product-wise break-up.

Product Basket	Weights	May-23	Jun-23	Jul-23	Aug-23
Manufacture of food products	5.30	0.4	-3.0	6.7	2.9
Manufacture of beverages	1.04	-1.7	1.6	4.1	9.4
Manufacture of tobacco products	0.80	-4.8	-17.0	0.3	7.4
Manufacture of textiles	3.29	-3.7	-0.1	1.1	1.6
Manufacture of wearing apparel	1.32	-21.2	-23.3	-22.3	-17.1
Manufacture of leather and related products	0.50	2.1	7.9	-3.5	3.9
Manufacture of wood products	0.19	-12.7	-12.5	-11.5	-2.9
Manufacture of paper products	0.87	-9.7	-1.8	-3.2	-0.5
Printing and reproduction of recorded media	0.68	0.2	-10.9	-8.8	2.8
Manufacture of coke and refined petroleum products	11.77	2.7	3.2	4.2	10.2
Manufacture of chemical products	7.87	-1.3	-2.5	-6.6	-4.3
Manufacture of pharmaceuticals	4.98	21.2	4.1	12.2	16.8
Manufacture of rubber and plastics products	2.42	7.2	0.9	0.1	4.0
Manufacture of other non-metallic mineral products	4.09	10.4	4.9	6.4	14.9
Manufacture of basic metals	12.80	10.8	15.1	13.7	15.7
Manufacture of fabricated metal products	2.65	4.7	-4.7	2.0	22.4
Manufacture of computer, electronic and optical products	1.57	-6.0	-32.3	-16.9	-8.7
Manufacture of electrical equipment	3.00	8.4	10.8	3.3	17.7
Manufacture of machinery and equipment	4.77	9.7	5.5	6.0	12.4
Manufacture of motor vehicles, trailers, and semi-trailers	4.86	13.7	7.6	8.0	12.0
Manufacture of other transport equipment	1.78	10.9	-0.1	-2.5	8.2
Manufacture of furniture	0.13	-12.6	-12.0	-11.1	-23.8
Other manufacturing	0.94	-0.5	-10.3	6.7	-4.5
MINING	14.37	6.4	7.6	10.7	12.3
MANUFACTURING	77.63	6.3	3.1	5.0	9.3
ELECTRICITY	7.99	0.9	4.2	8.0	15.3
OVERALL IIP	100.00	5.7	3.8	6.0	10.3

Data Source: MOSPI

The last column showing the August 2023 IIP numbers has been shaded for clarity. Here are some of the major takeaways from the IIP break-up of August 2023.

• The higher IIP growth of 10.3% in August 2023, compared to 6.0% in July 2023 (revised), was largely triggered by across the board growth. For instance, Mining output for August 2023 grew at 12.3% and electricity at 15.3% compared to 10.7% and 8.0% respectively in July 2023. However, over the previous month, the manufacturing IIP bounced from 5.0% to 9.3%. Obviously, with manufacturing having a weight of 77.63% in the IIP basket, that predominance of manufacturing ensured that the impact on IIP got magnified.

   

• In the month of August 2023, the products that saw the highest positive growth were categories like fabricated metals, electrical equipment, pharmaceuticals, basic metals, non-metallic minerals, machinery, and motor vehicles. The products that saw the sharpest fall in growth on a yoy basis include furniture, wearing apparel, computer electronics and chemical products. The pressure is most evident in the export driven sectors, where weak global demand amidst recession fears has hit growth.

While the base effect did have an impact on the surge in IIP, it cannot be forgotten that this robust growth comes amidst severe global headwinds with exports being hit by weak global demand. The IIP growth has purely come from inward looking and India specific sectors. That is what makes the IIP story more sustainable. But, for that, we have to wait for more data points before the assumption can be confirmed.

Interpreting the annual IIP data so far

The table below captures the IIP growth on an annual basis over the last 4 financial years. The overall IIP product basket is not only broken up in terms of the 3 broad classifications of mining, manufacturing, and electricity, but also on a product-wise basis. The latest fiscal year that FY2023-24 refers to the 5 months cumulative data from April to August 2023.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.30	-2.7	5.9	3.8	2.2
Manufacture of beverages	1.04	-25.8	11.5	19.9	0.7
Manufacture of tobacco products	0.80	-14.3	8.7	-0.6	-8.3
Manufacture of textiles	3.29	-21.3	29.3	-8.7	-1.8
Manufacture of wearing apparel	1.32	-29.9	27.4	-7.4	-22.6
Manufacture of leather and related products	0.50	-18.0	1.3	-5.8	0.2
Manufacture of wood products	0.19	-19.6	15.1	-0.8	-11.2
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-4.6
Printing and reproduction of recorded media	0.68	-28.0	12.4	23.4	-2.6
Manufacture of coke and refined petroleum products	11.77	-12.2	8.9	5.7	3.7
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-2.5
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	15.3
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	2.8
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	8.6
Manufacture of basic metals	12.80	-5.8	18.6	8.1	13.5
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	4.2
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-16.4
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	11.3
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	8.3
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	9.0
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	5.3
Manufacture of furniture	0.13	-27.9	23.3	16.4	-17.8
Other manufacturing	0.94	-22.5	49.0	-3.0	-2.8
MINING	14.37	-7.8	12.2	5.8	8.3
MANUFACTURING	77.63	-9.6	11.8	4.7	5.8
ELECTRICITY	7.99	-0.5	7.9	8.9	5.4
OVERALL IIP	100.00	-8.4	11.4	5.2	6.1

Data Source: MOSPI (# Apr-23 to Aug-23)

There are some interesting trends that emerge by looking at a period starting the COVID year and going forward. 

• The sharp full year growth in FY22 was on a very low base since FY21 had seen prolonged COVID shutdowns. Hence that is not a reliable figure. However, FY23 saw the full year IIP growth normalize to 5.2%, while for the first 5 months of FY24, the cumulative IIP growth stands at 6.1% on an annualized basis. It is still too early to say if the IIP can pick up, but there are some positive indications in the form of a revival in the capital investment cycle. Capital goods and construction companies are seeing their order books overflowing; and that is normally a very reliable lead indicator that big growth in IIP is waiting to happen. 

   

• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth. Let us look at the positives first. IIP growth (especially the manufacturing IIP) has grown on the back of sectors like pharmaceuticals, basic metals, electrical equipment, plant & machinery as well as motor vehicles. These have been positive triggers for the manufacturing IIP in the first 5 months of FY24. What about the negative triggers. Pressure has come in FY24 from wearing apparel, computer & electronics, furniture, and tobacco products. Most of the are export basket products and amidst fears of a global slowdown, it is hardly any surprise. 

The good news is that annualized IIP for FY24 is already 90 bps better than FY23. But the more gratifying news is that manufacturing IIP for FY24 is nearly 110 bps above the comparable figure of FY23. This can be attributed to the fructifying of the PLI schemes and the revival of the capital investment cycle. However, this is annualized data for 5 months of FY24 and the final number would largely depend on what happens in the second half of FY24. In a volatile global scenario, that remains an X-factor at this point of time.

Will the RBI use robust data to hike repo rates?

October 2023 marked the fourth successive monetary policy when the RBI maintained status quo on rates. Perhaps, the equation has slightly changed in the last few months with the spike in inflation. However, the sharp fall in inflation between July and September is rather encouraging. Here is what the RBI is likely to do, post the IIP data.

• What we have seen in the last few months is the RBI focusing its monetary policy on inflation, but not losing sight of growth. In fact, the pause in the rates can be largely attributed to the pressure from the industry bodies, worried about rising interest costs for Indian corporates. With IIP starting to show a manufacturing boost, the RBI could use the buffer to hike rates. But, that looks unlikely in the light of the sharp fall in India inflation as well as the Fed also planning to go slow on rate hikes.

   

• RBI would be pleased that the domestic growth factors have been more than capable of offsetting the global headwinds and still grow output. At this juncture, the RBI would not want to spoil the growth party; especially at a time when inflation is also tapering in India. RBI may use this Goldilocks effect to wait just that bit longer!

October 2023 monetary policy has come and gone, and now it looks like the RBI will not hike rates in 2023. A lot will now predicate on how consumer inflation and IIP growth pan out in India in the second half of FY23.