IIP bounces to 5.2% in January 2023 as manufacturing picks up

13 Mar 2023 , 09:57 AM

It showed a marked bounce in IIP (index of industrial production) growth. In December 2022, IIP growth had fallen from 7.58% to 4.68% due to the pressure on exports amidst a global slowdown. However, in January 2023, IIP growth has again bounced back to 5.17%. Compared to December, it is just 49 bps improvement, but it is still commendable as it comes amidst global macro headwinds. We had negative IIP numbers in August and in October, so it is too early to pronounce that the ghosts of negative IIP have been exorcized.

Month	IIP Growth (%)
Jan-22	1.98%
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%

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, October 2022 IIP went through final revision while December 2022 IIP underwent first revision. The final revision for September is 15 bps better from -4.22% to -4.07%. In addition, the first revision of December 2022 IIP has pegged it 43 bps higher at 4.68%. This raises hope of a better January 2023 IIP too.

One of the important considerations in yoy IIP growth is the base effect. However, it must be noted here that the January 2023 IIP figure is higher on a much higher base. For example, the December 2022 IIP of 4.68% was on a low base of 1.02% in December 2021. In comparison, the January 2023 IIP growth is 5.17% on a base of 1.98% in January 2022. That is likely to be favourable since the base for February will once again be lower.

However, it may be premature to celebrate since a few swallows do not a summer make. The global headwinds are still intact. The Fed is still very hawkish; as is the RBI. The yield curve in the US and also in India have inverted giving indications of a possible slowdown. Negative yield curve slope indicates that investors are unwilling to commit to long term debt. The Russia Ukraine war is far from over and that would be a major geopolitical overhang on markets. There are fears that major global economies like the US, UK and EU could dip into recession, impacting demand for Indian goods and services.  

How the sectoral break-up of IIP looks like in January 2023

January 2023 marks the 10th month of FY23. Let us first look at the monthly figures of the 3 principal components of IIP in January 2023. Mining growth for January 2023 was 8.81%, manufacturing grew by 3.66% while Electricity grew at 12.68%. Overall growth in IIP for January 2023 at +5.17% was better than December 2022, despite a higher base and despite the short-term headwinds. Manufacturing, with 77.63% weight, still held the key.

Let us also look at the cumulative picture for the first 10 months of FY23 from April 2022 to January 2023. For FY23 till date, mining grew at 5.8%, manufacturing at 4.8% and electricity at 10.1%. The cumulative IIP growth for FY23 till January 2023 stands at a steady 5.4%, almost flat compared to the previous 3 months cumulative figure. This points towards a more stable IIP progress in India.

IIP basket components; leaders and laggards

IIP growth of +5.17% for January 2023 is better than December 2022, albeit by just 49 bps. One thing is clear from the IIP data that there is optimism about the Indian economy and that is boosting output and inventory build-up, notwithstanding the gnawing concerns in global market demand. Let us first focus on the positive triggers for IIP in January 2023. Products that triggered the positive surge in IIP for the month include Electrical equipment (+13.6%), Beverages (+13.4%), Motor Vehicles (+12.9%), Machinery & equipment (+11.3%), Pharmaceuticals (+9.2%), food products (+8.3%) and Recorded Media (+7.7%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in January 2023 were computer & electronics (-29.6%), wearing apparel (-22.3%), tobacco products (-14.5%), Textiles (-11.0%) and metal products (-8.1%). If you look at the mix of the IIP depressants, most of them are coming from the export dependent sectors. That is indicative of the global uncertainty and recession fears impacting exports. 

How does the use-based perspective look like for January 2023? In terms of user groups, Primary Goods grew 9.6%, Capital Goods grew 11.0%, Intermediate goods flat at 0.1% and infrastructure goods grew by 8.1%. However, consumer non-durables demand contracted by -7.5% while consumer durables showed growth of 6.2%. One good thing is that the consumer demand damage in India is not as acute as it is in the US and the west.

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

We can break up the 5.17% yoy IIP growth for January 2023 into mining, manufacturing, and electricity. But, more importantly, it is the high frequency month-on-month growth that gives a clear picture of short-term momentum in IIP basket. The table below captures the sequential IIP performance of January 2023 over December 2022 in the last column.

Weight	Segment	IIP Index Jan-22	IIP Index Jan-23	IIP Growth Over Jan-22	IIP Growth (HF) Over Dec-22
0.1437	Mining	124.90	135.90	+8.81%	+2.57%
0.7764	Manufacturing	139.20	144.30	+3.66%	+0.14%
0.0799	Electricity	165.60	186.60	+12.68%	+4.01%
1.0000	Overall IIP	139.30	146.50	+5.17%	+0.83%

Data Source: MOSPI (HF refers to high frequency)

The high frequency growth is not as impressive as last month, but the good thing is that it remains positive across all the 3 segments of IIP. Sequential MOM IIP surged 6.03% in November 2022 and another 5.31% in December 2022. With that kind of momentum, some normalization of the high frequency growth was on the cards and the 0.83% growth in January 2023 must be seen from that perspective. The good news are the sharply positive short-term vibes from mining and electricity even as manufacturing has been relatively subdued in the current month. The positive takeaway is that 3 consecutive months of decisively positive IIP growth is certainly a positive signal.

Will the RBI lean towards a more hawkish approach?

That shift in RBI stance is unlikely to happen, at least in the immediate future. If one reads through the minutes of the last MPC meet, 4 out 6 members are still veering towards raising rates till inflation approaches the 4% target. It is still far from that point, so for now hawkishness is unlikely to change. RBI may not go beyond 25 bps hikes for now in terms of rate hikes, but it looks like the terminal rates may now be closer to 7%. The strongly hawkish tone of the Fed and the robust labour data in the US is likely to stymie any desire of the RBI MPC members to shift to a dovish stance. India is already the fastest growing large economy in the world, so the RBI does not see any reasons to change the narrative for the time being. 

However, the divide in the MPC could get more acute. Already, Ashima Goyal and Jayanth Varma voted against a rate hike and demanded an accommodative monetary stance in their last two policies. For now, the demands of the dovish camp are logical but the RBI would not want to miss out on the way they have effectively regulated inflation expectations. With volatile FPI flows, RBI is unlikely to stray too much from its avowed hawkish stance.