February 2024 IIP bounces to 5.67%, on manufacturing boost

13 Apr 2024 , 02:30 PM

FEBRUARY 2024 IIP RALLIES DESPITE HIGHER BASE

In the last two months, the high base effect kept a cap on the IIP growth. However, this time around, the base IIP saw a 20 bps spike. However, despite the higher base, the IIP for February 2024 rallied to a robust 5.67%. There was all-round growth compared to January; as manufacturing, mining and electricity saw higher levels of IIP growth compared to January 2024. It must be noted here that the January 2024 IIP growth did see an upward revision of 30 bps to 4.14%. However, even after the upgrade, the February IIP growth number of 5.67% looks comfortably higher. The GDP growth for Q3FY24 came in at 8.4% and the full year GDP is likely to be above 8%. Obviously, that pre-supposes robust IIP levels too. After all, manufacturing has a weightage of 77.6% in the IIP basket, and therefore, the overall IIP and also the GDP tend to gravitate towards the manufacturing number.

HIGH FREQUENCY IIP GROWTH IN FEB-24

What exactly do we understand by high frequency growth? The regular IIP growth that we get to see is yoy growth, which is compared to the year-ago period. However, there is one shortcoming in looking at yoy growth. It  is still too vulnerable to the base effect and does not capture the short term eccentricities of IIP data properly. That gap is filled by the MOM high frequency IIP data. How does that look for February 2024? For the month of February 2024, the high frequency mining IIP was down -3.12% and the high frequency electricity IIP was also down -5.07%. There was also short term pressure on manufacturing at -4.11%. This resulted in the overall MOM (high frequency) IIP reading for February 2024 sharply down by -4.10%. Clearly, most of the pressure has come from the manufacturing contraction on MOM basis; considering its weightage in the IIP basket.

MINING, MANUFACTURING, ELECTRICITY – BACK TO WINNING WAYS YOY

In the last 3 months, the trend in mining, manufacturing, and electricity have been oscillating. For example, in December 2023, the yoy growth in manufacturing was robust while that of mining and electricity was tepid. In January 2024, it was manufacturing growth that was relatively tepid, while mining and electricity showed robust growth. In February 2024, all the 3 have shown sharply better levels compared to the previous month. Here is how the key components of the IIP basket look like in February 2024.

Let us start with mining IIP for February 2024 on yoy basis. The February 2024 mining IIP growth was at a robust 8.05% compared to 5.88% in January 2024. If you look at electricity IIP, it stood at 7.53% in February 2024, compared to 5.63% in January 2024. The trend was sustained by manufacturing too, which saw IIP growth in February 2024 surge to 5.01% compared to just 3.57% in January 2024. As a result, the overall IIP for February 2024 at 5.67% was sharply higher than the revised IIP reading of 4.14% for January 2024 due to the turnaround in manufacturing, mining, and electricity.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

The table captures monthly IIP growth number on yoy basis. Despite the base IIP number between January 2023 and February 2023 shifting higher from 5.81% to 6.01%; Feb-24 IIP surged sharply, showing genuine pick-up across the 3 segments. This is partially attributed to robust growth in domestic demand; both at a consumer and industrial level.

Month	IIP Growth (%)
Feb-23	6.01%
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	4.25%
Jan-24	4.14%
Feb-24	5.67%

Data Source: MOSPI

The big question is whether the Red Sea crisis has stopped pinching the IIP. It may be too early to celebrate. One inference would be that India being a largely domestically market, is able to handle the slowdown a lot better. Also, the 8% plus GDP growth is being driven largely by domestic consumer and industrial demand, so it is largely immune to the global geopolitical risks. Let us now turn to how the IIP revisions in February 2024 panned out.

There are 2 revisions that each IIP reading goes through. A month after the IIP announcement, it goes through the first revision and 3 months later the IIP goes through the final revision. The November 2023 IIP underwent final upward revision of 7 basis points from 2.40% to 2.47%. The January 2024 IIP saw the first revision taking the IIP reading higher by 34 bps from 3.80% to 4.14%. We now have to await the final revision to December 2023, and the first revision to February 2024 next month, for a clearer trend picture.

FEB-24 IIP BASKET: BROAD-BASED BOUNCE LOOKS GENUINE

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	Nov-23	Dec-23	Jan-24	Feb-24
Manufacture of food products	5.3025	-3.7%	2.5%	-0.2%	2.0%
Manufacture of beverages	1.0354	8.4%	3.2%	7.8%	13.4%
Manufacture of tobacco products	0.7985	-14.5%	-9.2%	-7.4%	-0.4%
Manufacture of textiles	3.2913	-4.6%	1.5%	3.1%	3.7%
Manufacture of wearing apparel	1.3225	-20.6%	-10.2%	-2.9%	-2.8%
Manufacture of leather and related products	0.5021	-16.4%	-2.1%	0.1%	1.8%
Manufacture of wood products	0.1930	-15.7%	-12.4%	3.5%	6.8%
Manufacture of paper products	0.8724	-5.7%	-7.7%	-6.2%	4.7%
Printing and reproduction of recorded media	0.6798	-6.6%	-4.2%	2.6%	5.8%
Manufacture of coke and refined petroleum products	11.7749	14.0%	7.3%	-2.2%	4.9%
Manufacture of chemical products	7.8730	-4.1%	0.2%	-1.9%	2.8%
Manufacture of pharmaceuticals	4.9810	-2.5%	3.0%	0.0%	-10.6%
Manufacture of rubber and plastics products	2.4222	1.7%	1.5%	6.1%	11.5%
Manufacture of other non-metallic mineral products	4.0853	-3.6%	3.1%	4.2%	9.6%
Manufacture of basic metals	12.8043	7.6%	8.3%	7.3%	8.8%
Manufacture of fabricated metal products	2.6549	-6.1%	9.0%	19.0%	14.9%
Manufacture of computer, electronic and optical products	1.5704	-23.9%	-5.2%	-7.4%	1.9%
Manufacture of electrical equipment	2.9983	-17.2%	5.0%	3.1%	10.0%
Manufacture of machinery and equipment	4.7653	-1.3%	0.7%	3.1%	3.8%
Manufacture of motor vehicles, trailers, and semi-trailers	4.8573	11.2%	9.8%	19.0%	11.6%
Manufacture of other transport equipment	1.7763	9.8%	29.4%	25.3%	24.4%
Manufacture of furniture	0.1311	-30.4%	-1.0%	15.1%	22.7%
Other manufacturing	0.9415	-15.1%	-26.3%	-6.6%	-6.5%
MINING	14.3725	7.0%	5.2%	5.9%	8.0%
MANUFACTURING	77.6332	1.3%	4.5%	3.6%	5.0%
ELECTRICITY	7.9943	5.8%	1.2%	5.6%	7.5%
OVERALL IIP	100.0000	2.5%	4.2%	4.1%	5.7%

Data Source: MOSPI

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

• The IIP growth of 5.7% in February 2024, compared to 4.1% in January 2024, was despite a higher base. That means, the growth has come from a genuine accretion in mining, manufacturing, and electricity production. The overall IIP obviously gravitated towards the manufacturing growth, considering its 77.6% weightage in the IIP basket.
• In the month of February 2024, the products that saw the highest positive growth were transport equipment, furniture, fabricated metal products, beverages, motor vehicles / trailers, rubber & plastic products, and electrical equipment. These are largely domestic demand triggered. The products that saw the sharpest fall in IIP include pharmaceuticals, miscellaneous products, and textiles. Apart from weak demand, the exports are also being hit by the Red Sea crisis and that is slowing this segment.

In February 2024, IIP grew despite a higher base. While domestic related sectors are robust, even the problems in the export driven sectors appear to be improving for the better.

READING BETWEEN THE LINES OF FY24 DATA (APR-FEB)

The table captures the IIP growth over last 4 fiscal years. The latest fiscal year FY24 refers to 11 months cumulative data from April 2023 to February 2024. For now, the cumulative IIP growth for FY24 is better than FY23 by a margin of 70 basis points.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.3025	-2.7	5.9	3.8	1.7
Manufacture of beverages	1.0354	-25.8	11.5	19.9	5.4
Manufacture of tobacco products	0.7985	-14.3	8.7	-0.6	-7.2
Manufacture of textiles	3.2913	-21.3	29.3	-8.7	0.6
Manufacture of wearing apparel	1.3225	-29.9	27.4	-7.4	-16.2
Manufacture of leather and related products	0.5021	-18.0	1.3	-5.8	-0.2
Manufacture of wood products	0.1930	-19.6	15.1	-0.8	-6.8
Manufacture of paper and paper products	0.8724	-23.3	17.7	0.6	-4.0
Printing and reproduction of recorded media	0.6798	-28.0	12.4	23.4	-1.5
Manufacture of coke and refined petroleum	11.7749	-12.2	8.9	5.7	4.3
Manufacture of chemicals and chemical products	7.8730	-2.1	4.3	6.9	-1.6
Manufacture of pharmaceuticals	4.9810	1.6	1.3	-2.4	7.2
Manufacture of rubber and plastics products	2.4222	-3.7	8.0	0.5	4.1
Manufacture of other non-metallic mineral products	4.0853	-12.9	20.1	6.6	6.6
Manufacture of basic metals	12.8043	-5.8	18.6	8.1	11.7
Manufacture of fabricated metal products	2.6549	-13.7	10.9	-1.6	7.6
Manufacture of computer, electronic and optical	1.5704	-12.6	11.1	-6.4	-12.2
Manufacture of electrical equipment	2.9983	-12.3	12.2	-4.2	6.7
Manufacture of machinery and equipment	4.7653	-14.1	11.0	10.5	7.0
Manufacture of motor vehicles and trailers	4.8573	-19.1	18.4	19.3	12.0
Manufacture of other transport equipment	1.7763	-18.0	1.6	11.6	12.8
Manufacture of furniture	0.1311	-27.9	23.3	16.4	-10.6
Other manufacturing	0.9415	-22.5	49.0	-3.0	-5.0
MINING	14.3725	-7.8	12.2	5.8	8.2
MANUFACTURING	77.6332	-9.6	11.8	4.7	5.4
ELECTRICITY	7.9943	-0.5	7.9	8.9	6.9
OVERALL IIP	100.0000	-8.4	11.4	5.2	5.9

Data Source: MOSPI (# Apr-23 to Feb-24)

The last column refers to data for the first 10 months of FY24; although that is a long enough period to credibly extrapolate the full-year picture.

• How does FY24 look, compared to FY22 and FY23. That may be like comparing apples and oranges because FY22 was on a very low base since FY21 was the year of COVID shutdowns. Hence FY24 and FY23 should offer a more reliable comparison. FY23 saw full year IIP growth normalize to 5.2%, while for first 11 months of FY24, cumulative IIP growth stands at 5.9% (70 bps spike). There are positive signals like robust Q3 GDP numbers, investment cycle revival, controlled fiscal deficit, CAD under 1% of GDP, and robust government capex spending.
• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth for FY24. IIP boost stems from sectors like transport equipment, motor vehicles, basic metals, fabricated metal products, pharmaceuticals, machinery & equipment, and minerals. What about negative pressures? The IIP losers in FY24 were the standard suspects like apparel, computer & electronics, furniture, tobacco products, and wood products. The common thread was the export stress.

Ironically, 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.

DOES THE RBI HAVE ENOUGH REASONS TO CUT RATES EARLIER?

Unlike the US Fed, RBI has been more sensitive to growth triggers, and rightly so. The latest April 2024 RBI monetary policy marked the seventh consecutive monetary policy when the RBI has held rates static at 6.5%. The debate is on whether the RBI would go ahead with rate cuts much earlier than anticipated. The US Fed has been cagey about cutting rates and, in retrospect, it has been right if you look at the recent surge in inflation in the US.  The RBI is already leaning towards 8% GDP growth in FY24 and over 7% in FY25 too. This is likely to be complemented by subdued levels of 5.4% inflation in FY24 and 4.5% inflation in FY25.

There are 2 justifications for the RBI to cut the reop rates. Firstly, the real rates (interest rates net of inflation) are much higher than the median. For FY25, the real rates are expected to be closer to 250 bps, which is inordinately higher than required. Secondly, at 6.5%, the repo rates are a full 135 bps above the pre-COVID rate of 5.15%. Pragmatists believe that the RBI would wait for the election outcome, formation of new government and the full budget presentation. However, the RBI has shown in the past that it can surprise the markets with its decisiveness and alacrity. If the RBI cuts rates earlier than July, it would be a welcome quencher amidst the hot and arid summer.