January 2024 IIP tepid at 3.80%, on high base effect

13 Mar 2024 , 09:39 AM

JAN-24 IIP SHARPLY LOWER THAN REVISED DECEMBER READING

This week, we saw the base effect again keeping the IIP growth in check. In fact, the manufacturing sector had triggered the growth last month, but it was manufacturing that put pressure on the overall IIP in this month. However, if you compare the January 2024 IIP of 3.80% with the original December 2023 IIP reading of 3.84%, then are almost at par. It is just that the December IIP saw a sharp upward revision which has optically widened the gap. However, with the GDP growth for the third quarter at 8.4% and the full year GDP likely to be close to 8%, the IIP traction is likely to be high in the coming months also. It may be recollected that manufacturing has a weightage of 77.6% in the IIP basket, and therefore, the overall IIP normally tends to gravitate towards the manufacturing number.

A QUICK LOOK AT THE HIGH FREQUENCY IIP GROWTH IN JAN-24

What exactly do we understand by the high frequency growth. The regular IIP growth that we get to see is the yoy growth, which is compared to the year-ago period. However, the yoy growth is still to vulnerable to the base effect and does not capture the short term eccentricities of the IIP data. That is captured by the MOM high frequency IIP data. How does that look for January 2024? For the month of January, the high frequency mining IIP was up 3.3% and the high frequency electricity IIP was up 8.54%. However, there was short term pressure on manufacturing at -0.86%. This resulted in the overall MOM (high frequency) IIP reading for January 2024 just about marginally higher by 0.59%. Clearly, most of the pressure came from the heavyweight manufacturing contraction on MOM basis.

MINING, MANUFACTURING, ELECTRICITY – A DIFFERENT DICHOTOMY

In the previous month of 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. Let us first look at the IIP data for January 2024, across the 3 baskets. Let us start with mining IIP for January 2024 on yoy basis. The January 2024 mining IIP growth was at 5.88% compared to 5.20% in December 2023. If you look at electricity IIP, it stood at 5.63% in January 2024, compared to 1.23% in December 2023. The exception was manufacturing which saw IIP growth in January 2024 falter to 3.16% as against 4.49% in December 2023. As a result, the overall IIP for January 2024 at 3.80% was lower than 4.25% in December 2023 due to the pressure from manufacturing. However, we have to wait for the revisions to get a clear picture.

THE IIP STORY OVER LAST ONE YEAR

The table captures monthly IIP growth number on yoy basis. The base IIP number between December 2022 and January 2023 shifted higher from 5.12% to 5.81%; causing the fall in IIP. This has been partially attributed to disruptions caused by the Red Sea crisis.

Month	IIP Growth (%)
Jan-23	5.81%
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	2.40%
Dec-23	4.25%
Jan-24	3.80%

Data Source: MOSPI

While the base effect has surely played a role, it is also about the evolving situation in the Middle East and West Asia. These are the fulcrum of global trade and the longer routes are adding to cost and time overruns in global trade. That impact is seen in the IIP number for January 2024. Even if the impact is not direct, the trickle-down effect is surely there for all to see. That is the reason, mining, and electricity (being internal sectors) were not impacted. However, manufacturing is still related to global supply chains and that hit output.

Let us turn to the IIP revisions? The IIP numbers go through two revisions. A month after the IIP announcement, it goes through the first revision and 3 months later it goes through the final revision. The October 2023 IIP underwent final upward revision of 31 basis points from 11.58% to 11.89%. The December 2023 IIP saw the first revision taking the IIP reading for the month higher by 41 bps from 3.84% to 4.25%. We now have to await the final revision to November 2023, and the first revision to January 2024 next month.

JAN-24 IIP BASKET: NOT ROSES ALL THE WAY

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

Product Basket	Weights	Oct-23	Nov-23	Dec-23	Jan-24
Manufacture of food products	5.3025	7.1	-3.9	2.5	-0.6
Manufacture of beverages	1.0354	10.8	8.4	3.2	9.3
Manufacture of tobacco products	0.7985	1.2	-15.0	-9.2	-7.4
Manufacture of textiles	3.2913	7.7	-4.3	1.5	3.1
Manufacture of wearing apparel	1.3225	-5.7	-20.6	-10.2	-1.6
Manufacture of leather and related products	0.5021	18.5	-16.2	-2.1	0.5
Manufacture of wood products	0.1930	-1.3	-15.7	-12.4	4.2
Manufacture of paper products	0.8724	-1.3	-3.9	-7.7	-6.3
Printing and reproduction of recorded media	0.6798	3.3	-3.7	-4.2	2.4
Manufacture of coke and refined petroleum products	11.7749	2.4	14.2	7.3	-2.2
Manufacture of chemical products	7.8730	3.6	-4.0	0.2	-1.5
Manufacture of pharmaceuticals	4.9810	13.1	-2.4	3.0	0.0
Manufacture of rubber and plastics products	2.4222	7.6	1.8	1.5	6.0
Manufacture of other non-metallic mineral products	4.0853	12.9	-3.0	3.1	4.1
Manufacture of basic metals	12.8043	13.0	7.2	8.3	5.8
Manufacture of fabricated metal products	2.6549	19.3	-5.3	9.0	21.4
Manufacture of computer, electronic and optical products	1.5704	-7.3	-24.0	-5.2	-11.9
Manufacture of electrical equipment	2.9983	12.7	-17.2	5.0	2.5
Manufacture of machinery and equipment	4.7653	25.6	-1.0	0.7	3.5
Manufacture of motor vehicles, trailers, and semi-trailers	4.8573	24.7	9.2	9.8	18.0
Manufacture of other transport equipment	1.7763	23.3	9.8	29.4	25.3
Manufacture of furniture	0.1311	-6.6	-30.5	-1.0	15.1
Other manufacturing	0.9415	30.6	-15.1	-26.3	-6.6
MINING	14.3725	13.1	7.0	5.2	5.9
MANUFACTURING	77.6332	10.6	1.2	4.5	3.2
ELECTRICITY	7.9943	20.4	5.8	1.2	5.6
OVERALL IIP	100.0000	11.9	2.4	4.2	3.8

Data Source: MOSPI

The last column showing the January 2024 IIP numbers has been shaded for clarity. Here are some of the major takeaways.

• The IIP growth of 3.80% in January 2024, compared to 4.25% in December 2023, was largely influenced by the base effect and the first revisions to the December data. At a broad level, there was a different kind of dichotomy. While the IIP growth of mining and electricity improved in January 2024, the manufacturing IIP edged lower. The impact was visible on the IIP due to the 77.6% weight of manufacturing in the overall IIP basket.
• In the month of January 2024, the products that saw the highest positive growth were transport equipment, fabricated metals, motor vehicles / trailers, furniture, and beverages. These are largely domestic demand triggered. The products that saw the sharpest fall in IIP include computer & Electronics, tobacco products, paper products and other manufactured products. Apart from weak demand, the exports are also being hit by the Red Sea crisis and that is causing a slowdown in some pockets.

While the heightened base led to a fall in IIP, there are a lot of hopes on the manufacturing space, especially considering the extremely robust GDP growth numbers in Q3 FY24.

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

The table captures the IIP growth over last 4 fiscal years. The latest fiscal year FY24 refers to 10 months cumulative data from April 2023 to January 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	1.6
Manufacture of beverages	1.0354	-25.8	11.5	19.9	4.8
Manufacture of tobacco products	0.7985	-14.3	8.7	-0.6	-7.8
Manufacture of textiles	3.2913	-21.3	29.3	-8.7	0.4
Manufacture of wearing apparel	1.3225	-29.9	27.4	-7.4	-17.5
Manufacture of leather and related products	0.5021	-18.0	1.3	-5.8	-0.3
Manufacture of wood products	0.1930	-19.6	15.1	-0.8	-8.0
Manufacture of paper and paper products	0.8724	-23.3	17.7	0.6	-4.7
Printing and reproduction of recorded media	0.6798	-28.0	12.4	23.4	-1.9
Manufacture of coke and refined petroleum	11.7749	-12.2	8.9	5.7	4.2
Manufacture of chemicals and chemical products	7.8730	-2.1	4.3	6.9	-1.9
Manufacture of pharmaceuticals	4.9810	1.6	1.3	-2.4	9.1
Manufacture of rubber and plastics products	2.4222	-3.7	8.0	0.5	3.4
Manufacture of other non-metallic mineral products	4.0853	-12.9	20.1	6.6	6.3
Manufacture of basic metals	12.8043	-5.8	18.6	8.1	11.9
Manufacture of fabricated metal products	2.6549	-13.7	10.9	-1.6	7.1
Manufacture of computer, electronic and optical	1.5704	-12.6	11.1	-6.4	-14.0
Manufacture of electrical equipment	2.9983	-12.3	12.2	-4.2	6.2
Manufacture of machinery and equipment	4.7653	-14.1	11.0	10.5	7.4
Manufacture of motor vehicles and trailers	4.8573	-19.1	18.4	19.3	11.8
Manufacture of other transport equipment	1.7763	-18.0	1.6	11.6	11.7
Manufacture of furniture	0.1311	-27.9	23.3	16.4	-13.3
Other manufacturing	0.9415	-22.5	49.0	-3.0	-5.0
MINING	14.3725	-7.8	12.2	5.8	8.3
MANUFACTURING	77.6332	-9.6	11.8	4.7	5.4
ELECTRICITY	7.9943	-0.5	7.9	8.9	6.8
OVERALL IIP	100.0000	-8.4	11.4	5.2	5.9

Data Source: MOSPI (# Apr-23 to Jan-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 10 months of FY24, cumulative IIP growth stands at 5.9% (70 bps higher). There are positive signals like robust Q3 GDP numbers, investment cycle revival, controlled fiscal deficit and government capex spending. These resulted in overflowing order books for capital goods companies and a sharp revival in core sector growth.
• 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 basic metals, motor vehicles, other transport equipment, pharmaceuticals, and machinery & equipment. What about negative pressures? The IIP losers in FY24 were the standard suspects like apparel, computer & electronics, furniture, wood products, and tobacco products. The common thread was the export stress caused by the Red Sea crisis.

The better IIP data, despite the Red Sea crisis, can be attributed to the trickle-down effect of the PLI schemes and revival of capital investment cycle. This has been helped by higher capex spending and targeted policy measures.

HOW WILL THE RBI INTERPRET THE IIP DATA?

Unlike the US Fed, the RBI has been fairly sensitive to growth triggers, and rightly so. In February 2023, the RBI ceased hiking rates as higher rates were putting immense pressure on corporates due to rising cost of funding and enhanced bankruptcy risk. For the last full year, the RBI has held status quo on repo rates through 6 monetary policies. Post the Q3 GDP growth coming in at 8.4%, the full year GDP for FY24 looks more likely to come in closer to the 8% mark. The RBI may revise its growth estimates only in the April monetary policy. Like the Fed, the RBI is also facing the “doing too much versus doing too little” dilemma.

Will the tepid IIP numbers push the RBI to cut rates in H1-2024? For now, the RBI may not have sufficient grounds for rate cuts. Growth is already robust and it does not want to risk triggering inflation by cutting rates. Also, there are more pragmatic compulsions with general elections coming up and the full budget to be presented only in July 2024. Most likely, the RBI may put off rate cuts till the new government is in place and the full budget has been presented. That is at least 4 good months away.