February 2023 IIP bounces to 5.56% on robust manufacturing growth

13 Apr 2023 , 09:41 AM

For February 2023, the IIP bounced sharply to 5.56%, as manufacturing and electricity showed strong traction. IIP is normally announced with a lag of one month; which means the February IIP number gets reported in mid-April. In January 2023, IIP growth had bounced from 4.68% to 5.17% as the pressure on exports bottomed out. February 2023 has seen IIP bounce further to 5.56%. However, it must be remembered that August 2022 and October 2022 had shown negative IIP, hence it may still be too early to celebrate. However, there are signs that the big risks may be behind.

Month	IIP Growth (%)
Feb-22	1.15%
Mar-22	2.20%
Apr-22	6.66%
May-22	19.72%
Jun-22	12.62%
Jul-22	2.21%
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	5.56%

Data Source: MOSPI

IIP revisions and the IIP base effect

More interesting is the revision of previous IIP. This time around, both IIP revisions are favourable. In the current IIP report, November 2022 IIP went through final revision while January 2023 IIP underwent first revision. The first revision for January 2023 is 29 bps higher from 5.17% to 5.46%. In addition, the final revision of November 2022 IIP has been held at 7.58%, so overall the underlying trend is positive and raises hopes of further upgrades.

One of the important considerations in yoy IIP growth is the base effect. IIP is a yoy number and compared to January 2023 IIP growth, the February 2023 IIP growth is on a much lower base. For example, the January 2023 IIP was on a much higher base of 1.98% in January 2022. In comparison, the base IIP growth of 5.56% for February 2023 is on a much lower base of 1.15% for February 2022. That will have to be adjusted for the real picture.

Downside risks to IIP growth still persist

In this enthusiasm about robust IIP numbers, one cannot overlook the macro risks and global headwinds that still persist. As of now, the Fed is still very hawkish. Even the RBI may have only paused its hawkishness in April 2023 and not changed it. The yield curve in the US is still inverted giving warning signals of a possible slowdown. The Russia Ukraine war is far from over and that would be a geopolitical overhang on markets. In the last couple of months, there is a global banking crisis that has been visible among smaller sized banks. All these could result in a slowdown in the developed economies like the US, UK, and EU, with concomitant impact on demand for Indian goods and services. 

Sectoral break-up of IIP in February 2023

Now, February 2023 marks the 11th month of FY23. Let us first look at the monthly figures of the 3 principal components of IIP in February 2023. Mining growth for February 2023 was 4.62%, manufacturing grew by 5.31% while Electricity grew at 8.21%. Overall growth in IIP for February 2023 at 5.56% was better than December 2022 and January 2023. Compared to January, the manufacturing IIP growth was a lot more robust in February and that made the big difference, considering the 77.63% weight that manufacturing has in IIP basket.

Let us also look at the cumulative picture for the first 11 months of FY23 from April 2022 to February 2023. For FY23 till date, mining grew at 5.7%, manufacturing at 4.9% and electricity at 10.0%. The cumulative IIP growth for FY23 till February 2023 stands at a steady 5.5%, 10 bps better than the average of the last 3 months. Clearly, the recovery in manufacturing is making a genuine difference to overall IIP.

IIP basket components; leaders and laggards

IIP growth of +5.56% for February 2023 is better than January 2023, albeit by just 10 bps if you consider the revised numbers. There is optimism about the Indian economy which is boosting output and inventory build-up, notwithstanding concerns over global demand. Let us first focus on the positive triggers for IIP in February 2023. Products that triggered the positive surge in IIP for the month include Pharmaceuticals (+23.0%), electrical equipment (+12.5%), Machinery & equipment (+10.8%), Beverages (+10.6%), Recorded Media (+10.4%) and Motor Vehicles (+8.2%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in February 2023 were Apparel (-17.0%), Wood products (-14.1%), Optical Products (-11.9%), Furniture (-11.1%) and Textiles (-9.8%). If you look at the mix of the IIP depressants, there is still pressure on the exports driven segments. That is indicative of the global uncertainty and recession fears and the likely impact on global demand.

How does the use-based perspective look like for February 2023? In terms of user groups, Primary Goods grew 6.8%, Capital Goods grew 10.5%, Intermediate goods flat at -0.3% and infrastructure goods grew by 7.9%. However, consumer durables demand contracted -4.0% while consumer non-durables showed growth of 12.1%. The damage to consumer demand has  been a lot more subdued in the last few months.

A quick look at the high frequency IIP data for February 2023

We can break up the 5.56% yoy IIP growth for February 2023 into mining, manufacturing, and electricity. But, more importantly, it is the high frequency month-on-month growth that gives a crystal clear picture of short-term momentum in IIP basket. The table below captures the sequential IIP performance of February 2023 over January 2023 in the last column.

Weight	Segment	IIP Index Feb-22	IIP Index Feb-23	IIP Growth Over Feb-22	IIP Growth (HF) Over Jan-23
0.1437	Mining	123.30	129.00	+4.62%	-5.08%
0.7764	Manufacturing	129.90	136.80	+5.31%	-5.52%
0.0799	Electricity	160.80	174.00	+8.21%	-6.75%
1.0000	Overall IIP	131.40	138.70	+5.56%	-5.58%

Data Source: MOSPI (HF refers to high frequency)

The high frequency MOM growth in the IIP is a key indicator that captures the short term triggers and momentum in industrial growth. In the last 3 months, the IIP growth on a sequential basis had been consistently in the positive. However, February is the first month when the short term moment is strongly negative and that is the trend across the three sectors viz. mining, manufacturing, and electricity. That is normally an indicator that the pace of IIP growth could slacken in the coming months. We have to wait and watch.

Does better IIP mean a less hawkish RBI?

This question becomes specifically important after the RBI ordered a pause in rate hikes in its April 2023 meeting. However, here are some key points to remember.

• The April 2023 halt in rate hikes had less to do with an improvement in IIP and more to do with an experimental shift. RBI wanted to check if a halt to rate hikes would really have an impact on consumer inflation.

   

• Secondly, the RBI was trying to frame a response mechanism should the global banking crisis worsen from current levels. There is already a possibility that the global central banks may go slow on rate hikes to avoid the banking crisis from escalating.

   

• Lastly, the RBI has underlined that this is a pause and not a change in monetary stance; and hence should not be construed as such. For the RBI, the rate hikes were never about IIP but always about controlling inflation. That is still work in progress. 

To sum it up, the IIP numbers are positive but are unlikely to have any impact on the RBI thinking on rates. That would continue to be driven by inflation and inflation expectations.