August 2024 IIP dips into negative, for first time in 22 months

14 Oct 2024 , 11:30 AM

AUG-24 IIP CONTRACTS BY -0.14%

If July 2024 saw the index of industrial production (IIP) gaining momentum at 4.84%; the month of August 2024 was a major disappointment. For the first time in 22 months, the IIP contracted by -0.14% for the month on a yoy basis. In a sense, the portents were already there when the core sector growth had dipped to -1.77% in August 2024. The core sector basket or the infrastructure basket constitutes about 45% of the IIP basket, so the direct correlation is not surprising. This slowdown in IIP can be attributed to two factors. On the one hand, many of the export driven sectors have taken a hit compared to previous months, due to the trade constraints imposed by the geopolitical crisis in West Asia. At the same time, the decision by the government to reduce the capex growth in FY25 to 11.1% from 30% in the previous two years, also led to a marked impact on capital spending and overall output. That impact also got transmitted to the IIP through the core sector. There was also the higher base factor. For example, between July 2023 and August 2023, the IIP had moved up sharply from 6.18% to 10.87%, so some base effect is also present in this contraction.

Remember, IIP is always reported with a lag of one-month. So, the IIP for July is reported in mid-September and the IIP for August just got reported in mid-October. The month of August saw deterioration in all the 3 segments viz. mining, manufacturing, and electricity. While the manufacturing output was still in positive, the mining output and electricity output for August dipped into negative territory. Manufacturing has a weightage of 77.63% in the IIP basket, and that prevented a sharper fall in the IIP. Normally, the IIP numbers go through two revisions i.e., first revision after 1 months and final revision after 3 months. This time revisions were mixed. The IIP growth of July 2024 saw the first downgrade of -14 bps from 4.84% to 4.70%. However, the May 2024 IIP saw a small upgrade of 7 bps from 6.18% to 6.25%. One has to wait for the first revision of August 2024 data.

HIGH FREQUENCY IIP GROWTH STAYS NEGATIVE IN AUGUST 2024

The regular IIP reading is yoy growth; which is with reference to the comparable month in the previous year. While it captures the secular trend, it overlooks the high-frequency short term momentum and is too vulnerable to the base effect. In India, it is equally important to understand this high frequency momentum in IIP. The MOM growth in IIP, therefore, captures these short term eccentricities in data more effectively. How does the high frequency MOM growth look like for the month of August 2024? Obviously, here we will be looking the components of IIP index with reference to their July 2024 numbers.

For August 2024, the high frequency growth across mining, manufacturing, and electricity were in the negative; so obviously, the headline IIP was also in the negative on MOM basis. That shows a good deal of pressure in the short term. For August 2024, the high frequency mining IIP was -7.75% lower, the manufacturing IIP was -1.62% lower, and the electricity IIP was -3.59% lower. As a result, the headline MOM IIP was also down by -2.54%. The MOM IIP numbers indicate that, irrespective of longer-term growth numbers, short term pressure is there. What is relevant is that, this month, even MOM manufacturing slipped in to negative.

HOW THE IIP TROIKA PERFORMED IN AUGUST 2024

In the last 3 months, the IIP Troika (mining, manufacturing, and electricity) was oscillating. In May 2024, it was manufacturing that faltered while mining and electricity saw positive growth yoy. In June 2024, manufacturing and electricity showed lower growth while mining IIP was the saving grace. In July 2024 all the 3 components were in the positive, although electricity was the fastest growing space. However, in August 2024, only manufacturing IIP showed positive growth yoy, while mining and electricity stayed in the negative.

Let us start with mining IIP for August 2024 on yoy basis. The August 2024 mining IIP growth contracted by -4.3%; in contrast to 3.7% growth in July and 10.3% growth in June 2024. If you look at electricity IIP, it contracted by -3.7% in August 2024; compared to 7.9% growth in July and 8.6% growth in June 2024. What about manufacturing. The Manufacturing IIP growth in August 2024 stood at 1.0%; compared to 4.6% growth in July and 3.2% growth in June 2024. As a result, the headline IIP for August 2024 contracted by -0.14%; compared to 4.70% (revised) in July and 4.73% in June 2024. Manufacturing proved the saving grace!

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

The broad trends from the IIP are modest but attractive in July 2024. Despite the base IIP number between June 2023 and July 2023 shifting higher from 4.05% to 6.18%; the yoy IIP growth in July is 11 bps higher at 4.84%. The election related slowdown in the previous month appears to be tapering out.

Month	IIP Growth (%)
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	5.47%
Apr-24	5.19%
May-24	6.25%
Jun-24	4.73%
Jul-24	4.70%
Aug-24	(0.14)%

Data Source: MOSPI

It is time to heed the warnings in the data. It is one thing to be extremely smug about the fact that India is still the fastest growing large economy in the world for 3 years in a row. However, it is another thing altogether to wake up and smell the coffee. The clear message is that there is a problem in the India growth story. For the last one year, the crisis in West Asia has been putting pressure on India trade. Many of the export items that had shown signs of revival, are tapering once again. The bigger concern is the way the government plays the trade-off between fiscal prudence and growth. The message for the government, especially in the light of the recent full budget, is that it is time to once again focus on capex and growth and let the fiscal deficit find its own equilibrium levels.

AUGUST 2024 IIP: IT WAS STRESS ACROSS THE BOARD

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

Product Basket	Weights	May-24	Jun-24	Jul-24	Aug-24
Manufacture of food products	5.3025	-5.5	2.5	-1.6	-1.5
Manufacture of beverages	1.0354	9.9	0.2	2.3	-2.9
Manufacture of tobacco products	0.7985	5.3	-10.9	13.1	-4.1
Manufacture of textiles	3.2913	-0.4	-1.5	0.2	1.9
Manufacture of wearing apparel	1.3225	10.2	2.1	7.3	14.0
Manufacture of leather and related products	0.5021	1.5	-3.9	7.4	2.1
Manufacture of wood products	0.1930	1.6	6.0	1.9	10.9
Manufacture of paper products	0.8724	4.0	-1.7	-0.4	-0.2
Printing and reproduction of recorded media	0.6798	3.6	-3.7	-4.8	-7.1
Manufacture of coke and refined petroleum products	11.7749	2.0	-0.8	6.8	-0.7
Manufacture of chemical products	7.8730	-0.4	1.0	5.2	2.7
Manufacture of pharmaceuticals	4.9810	7.5	-2.9	-8.2	-6.1
Manufacture of rubber and plastics products	2.4222	-0.3	7.6	8.6	6.0
Manufacture of other non-metallic mineral products	4.0853	0.5	3.1	1.9	-2.2
Manufacture of basic metals	12.8043	9.5	6.7	5.4	3.0
Manufacture of fabricated metal products	2.6549	12.3	3.6	11.7	-6.5
Manufacture of computer, electronic and optical	1.5704	18.6	10.5	10.5	11.6
Manufacture of electrical equipment	2.9983	15.1	31.8	28.6	17.7
Manufacture of machinery and equipment	4.7653	1.6	1.8	5.3	-1.7
Manufacture of motor vehicles, trailers	4.8573	6.6	4.2	3.2	0.5
Manufacture of other transport equipment	1.7763	16.8	9.1	25.5	7.5
Manufacture of furniture	0.1311	36.7	16.2	9.8	13.9
Other manufacturing	0.9415	-8.5	-12.5	-14.4	-8.2
MINING	14.3725	6.6	10.3	3.8	-4.3
MANUFACTURING	77.6332	5.1	3.2	4.4	1.0
ELECTRICITY	7.9943	13.7	8.6	7.9	-3.7
OVERALL IIP	100.0000	6.3	4.7	4.7	-0.1

Data Source: MOSPI

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

• The IIP contraction of (0.14%) in August 2024; is a sharp departure from growth of 4.73% (revised) in July 2024 and 4.73% in June 2024. The only saving grace is that is that the July IIP number is on a base that is higher by 469 bps, so the impact of IIP actually may be looking a lot worse that it should be. Manufacturing growth in the IIP basket is still in the positive at 1.0% and that has helped to hold the IIP in August 2024. After all, manufacturing has 77.6% weightage in the overall IIP basket.
• In the month of June 2024, the products that saw the highest positive growth were electrical equipment, wearing apparel, furniture, computers & electronics, wood products, other transport equipment and plastic products, . Most of these sectors are export dependent and the good news is that the impact of the West Asia crisis has been limited. However, there were also several products that saw pressure on growth; apart from mining and electricity. Even in the manufacturing basket; there was pressure on fabricated metal products, transport equipment, pharmaceuticals, and tobacco products.

In August 2024, manufacturing dipped by 340 bps, but stayed positive at 1.0%. The month-on-month dip was much sharper at 810 bps in mining and a whopping 1,160 bps in electricity. While the sharp fall can be attributed to the base effect, that only explains part of the story. Government has been relatively slower on the economic reforms front, essentially considering that this is a coalition government.

A QUICK LOOK AT THE ANNUALIZED IIP DATA

The latest fiscal year FY25 now has 5 months of data from April to August 2024; which is sufficient to extrapolate a picture for the full fiscal year. The cumulative IIP growth for FY25 fell to 4.2% at the end of August compared to 5.2% at the end of July 2024. If you compare with the previous full financial years; the FY25 5-months cumulative growth is sharply lower the IIP growth of the last 3 years. Hopefully, IIP should evolve more favourably in FY25.

Product Basket	Weights	2021-22	2022-23	2023-24	2024-25
Manufacture of food products	5.3025	5.9	3.8	1.6	-4.1
Manufacture of beverages	1.0354	11.5	19.9	5.1	4.6
Manufacture of tobacco products	0.7985	8.7	-0.6	-8.3	-1.5
Manufacture of textiles	3.2913	29.3	-8.7	0.1	0.0
Manufacture of wearing apparel	1.3225	27.4	-7.4	-14.1	9.2
Manufacture of leather and related products	0.5021	1.3	-5.8	-1.0	-0.4
Manufacture of wood products	0.1930	15.1	-0.8	-5.9	3.1
Manufacture of paper and paper products	0.8724	17.7	0.6	-3.6	-0.7
Printing and reproduction of recorded media	0.6798	12.4	23.4	-1.4	-3.9
Manufacture of coke and refined petroleum	11.7749	8.9	5.7	3.9	2.4
Manufacture of chemicals and chemical products	7.8730	4.3	6.9	-1.5	1.7
Manufacture of pharmaceuticals	4.9810	1.3	-2.4	8.0	-1.3
Manufacture of rubber and plastics products	2.4222	8.0	0.5	4.4	4.9
Manufacture of other non-metallic mineral products	4.0853	20.1	6.6	6.5	1.0
Manufacture of basic metals	12.8043	18.6	8.1	11.6	6.7
Manufacture of fabricated metal products	2.6549	10.9	-1.6	8.3	5.9
Manufacture of computer, electronic and optical	1.5704	11.1	-6.4	-11.3	10.8
Manufacture of electrical equipment	2.9983	12.2	-4.2	7.5	19.1
Manufacture of machinery and equipment	4.7653	11.0	10.5	6.6	1.4
Manufacture of motor vehicles and trailers	4.8573	18.4	19.3	11.6	5.2
Manufacture of other transport equipment	1.7763	1.6	11.6	13.9	14.8
Manufacture of furniture	0.1311	23.3	16.4	-5.5	24.5
Other manufacturing	0.9415	49.0	-3.0	-6.2	-6.9
MINING	14.3725	12.2	5.8	7.5	4.8
MANUFACTURING	77.6332	11.8	4.7	5.5	3.6
ELECTRICITY	7.9943	7.9	8.9	7.1	7.1
OVERALL IIP	100.0000	11.4	5.2	5.9	4.2

Data Source: MOSPI (FY25 is 5-Months data)

The last column refers to cumulative data for FY25; but then it is for just 5 months which is a fair representation of the full year. The real story of FY25 is not in the overall number but in the components of the IIP basket. For example, if you look at the FY25 IIP numbers, some of the items have shown a sharp turnaround are parts of the export basket. Sample this comparison in growth between FY24 and FY25. Wearing apparel turned around from -14.1% to +9.2%; wood products from -5.9% to +3.1%; computers & electronics from -11.3% to +10.8%; and furniture from -5.5% to +24.5%. However, there are also some product items that saw IIP deterioration in FY25; including food products and pharmaceutical products. IIP growth for FY25 at 4.2% appears to be slightly under pressure; especially as it has fallen by a full 100 bps in the last one month. With nearly half the year gone, it is difficult to fathom how the IIP growth can be engineered to recover sharply from the current levels.

EVENTUALLY, WEAK GROWTH MAY DRIVE RBI TO CUT RATES?

While IIP is not supposed to be a critical data point for the RBI in deciding inflation, growth remains a key USP for the Indian economy. India is already the fastest growing economy in the last 3 years and could repeat the feat in the fourth year too; subject to the IIP not being allowed to fall too sharply. The RBI, obviously, would not want higher interest and higher cost of funds to play spoilsport; which appears to be partially the case today. For the benefit of RBI, the CPI inflation has remained under the RBI’s long term target of 4% for 2 months in a row; although it is expected to spike in September 2024. One must not forget that the Fed has taken the lead to go ahead and trigger 50 bps rate cut, at the first sign of a growth crisis.

Now, the RBI has 2 reasons to cut rates. Firstly, with the Fed cutting rates by 50 bps; the RBI cannot afford to persist with monetary divergence for too long. Most likely, the RBI could be cutting rates either in December 2024 or latest by February 2025. The current repo rates are a good 135 bps above the pre-pandemic rates and the real rates are unsustainably high at well over 2%. One thing is certain. Growth pangs spook the RBI and the government to a large extent. The IIP contraction in August 2024 may just be the trigger for the RBI to embark on rate cuts.