IIP tapers to 4.3% in December 2022 on global demand pressure

11 Feb 2023 , 11:20 AM

The latest IIP figure for December 2022 (IIP is announced with 1-month lag) marked a relatively tepid factory output growth. In November 2022, IIP growth had sharply turned around to +7.34% from -4.22% in October 2022. However, in December 2022, the IIP growth has once again tapered lower to +4.25%. It is too early to say if the two negative IIP figures in the last 6 months were a freak case or whether IIP could again dip into negative. However, IIP is vulnerable to the base effect and also recent IIP numbers have seen pressure emanating from the export segment due to the impact of recession fears on global demand. 

Each month, the previous month’s IIP goes through the first revision while the 3-month old IIP goes through a final revision. In the latest month, the August 2022 IIP has seen a final downward revision of 15 basis points from 3.47% to 3.32%. In contrast, the first revision of November 2022 IIP has pegged it 23 bps higher at 7.34%. This raises the hope that even the December IIP could get positively modified as part of its primary revision.

To an extent, the base effect was only partially responsible for the fall in IIP in December 2022. For instance, the December 2022 IIP of 4.25% was on a low base of 1.02% in December 2021. That clearly indicates that much of the pressure on IIP growth in December came from the export segments like textiles, leather, furniture etc. The next few months could be critical since the IIP base is likely to remain low till March 2023 and only after that the higher base will start pulling the IIP down. That should be the focus area now.

Why is it that exports hold such an important role in deciding the future trajectory of IIP growth? for starters, the Ukraine war is threatening to create a full blown energy crisis and the impact is already visible with full European sanctions imposed on Russian oil imports. Also, there are fears that major global economies like the US, UK and the EU could see excess consumer and corporate caution setting in due to recession fears. This is already visible in export oriented sectors and is genuinely hitting demand and exports. Of course, the Union Budget 2023-24 has been largely reformist while the monetary policy continued to play it safe and raising the repo rates, albeit at a much slower pace.

How the sectoral IIP break-up looks like in December 2022

December 2022 marks the 9th month of FY23 and now the cumulative IIP figure is as a lot more representative of the full year picture. Let us first start with the monthly figures of the 3 principal components of IIP in December 2022. Mining growth for November 2022 was 9.80%, manufacturing grew by 2.65% while Electricity grew at 10.40%. Overall growth in IIP for December 2022 at +4.25% was lower compared to November 2022. This fall in IIP over November was largely on account of pressure on manufacturing, with its 77.63% weight.

Let us also look at the cumulative picture for the first 9 months of FY23 from April 2022 to December 2022? For FY23 till date, mining grew at 5.4%, manufacturing at 4.8% and electricity at 9.9%. The cumulative IIP growth for FY23 till December 2022 stands at 5.4%, almost flat compared to the previous two months cumulative figure. The smoothened annualized cumulative picture is pointing towards a more stable IIP progress in India.

How IIP product basket fared in December 2022

IIP growth of +4.25% for December 2022 is lower than November but positive nevertheless. One thing is apparent from the IIP data that there is internal optimism about the Indian economy and that is boosting output and inventory build-up. However, such enthusiasm is not shared when it comes to global market demand. But, let us first focus on the positive triggers for the IIP in December 2022. Products that triggered the positive surge in IIP for December 2022 include Pharmaceuticals (+16.0%), Printing & Recorded Media (+13.6%), Motor Vehicles (+11.6%), Machinery & equipment (+10.9%), Non-metallic minerals (+6.8%), Furniture (+15.7%), basic metals (+5.2%) and paper products (+4.1%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in December 2022 were computer & electronics (-37.0%), wearing apparel (-21.9%), tobacco products (-12.1%), Textiles (-11.9%) and leather products (-11.6%). If you look at the mix of the IIP depressants, most of them are export dependent sectors. That is an indication that the global uncertainty and central bank hawkishness has taken a sharp toll on exports. However, if you look at the cumulative IIP for first 9 months to December 2022, there are only 5 sectors with negative cumulative growth. Cumulative data is still quite palatable.

Let us also turn to the use-based perspective of IIP growth for December 2022? In terms of user groups, Primary Goods grew 8.3%, Capital Goods grew 7.6%, Intermediate goods tapered by -0.3% and infrastructure goods grew by 8.2%. The good news was the sustained bounce in consumer non-durables demand at 7.2% but that was not the case with consumer durables that showed contraction of -10.4%. There are green shoots of optimism, but for that to really happen, we need to see the consumer durables user group also back.

Sneak peek at high frequency data in December 2022?

We can break up the 4.25% yoy IIP growth for December 2022 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 also captures the sequential IIP performance of December over November in the last column.

Weight	Segment	IIP Index Dec-21	IIP Index Dec-22	IIP Growth Over Dec-21	IIP Growth (HF) Over Nov-22
0.1437	Mining	120.40	132.20	+9.80%	+7.74%
0.7764	Manufacturing	139.80	143.50	+2.65%	+2.65%
0.0799	Electricity	162.50	179.40	+10.40%	+7.62%
1.0000	Overall IIP	138.80	144.70	+4.25%	+5.31%

Data Source: MOSPI

That appears to be a lot of positive vibes on the IIP front in December 2022 from a short term momentum perspective. After sequential MOM IIP surged 6.03% in November, it is again up 5.31% in December 2022. The good news is the sharply positive short term vibes from mining and electricity even as manufacturing has stayed at the same level as yoy growth. Two consecutive months of decisively positive IIP growth is surely a good signal.

Will strong IIP data change the RBI rate perspective?

In its December 2022 policy, RBI restricted hawkishness to just 35 bps instead of its usual 50 bps and further reduced the hawkishness to 25 bps in February 2023. However, the bottom line is that the RBI continues to be hawkish and will, perhaps, continue to stay hawkish till the Fed does not officially change its stance. The first advance estimate of GDP and the RBI policy have pegged FY23 GDP at 7%, making India the fastest growing large economy in the world. That raises the question of whether rate hikes would impair the growth momentum?

Already, the latest MPC meet in February saw a clear divide with Ashima Goyal and Jayanth Varma voting against a rate hike and demand an accommodative stance of monetary policy. While RBI has not spoken about a terminal repo rate, we may be close to it, if not at it already. RBI would not want to lose control of growth, something it can actually control.