July 2023 IIP improves to 5.65%, as manufacturing stages a bounce

13 Sep 2023 , 11:20 AM

Some help did come from a lower base in July 2022, although that was only a marginal benefit. While mining and electricity did better than the previous month, it was manufacturing that bounced sharply from 3.1% to 4.6%. That magnified the impact on IIP, considering the fact that manufacturing has a weight of 77.63% in the overall IIP basket. It must be remembered here that IIP is reported with a lag of one month; which means the July IIP growth gets reported in mid-September and so on. Let us first look at the IIP figure on a month-wise basis for the last one year.

IIP growth shows a distinct bounce in July 2023

The table below captures the monthly IIP growth number captured on a yoy basis. The base effect did play a key role in the IIP improving in July 2023.

Month	IIP Growth (%)
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	6.01%
Mar-23	1.90%
Apr-23	4.61%
May-23	5.30%
Jun-23	3.76%
Jul-23	5.65%

Data Source: MOSPI

The base of July 2022 is lower than the base of June 2022, so the higher growth is partially due to the base effect and partially due to growth traction. But, let us first look at the revisions for the previous month and for the 3-months back IIP number. The IIP numbers typically go through two rounds of revisions. A month after the IIP announcement it goes through the first revision and 3 months later it goes through the final revision. The April 2023 IIP has undergone a final upward revision of 15 basis points from 4.46% to 4.61%. At the same time the June 2023 IIP has also undergone the first upward revision of 7 basis points from 3.69% to 3.76%. Upward revisions are positive moves since they give the hope that even the July IIP to can be eventually revised upwards. But, let us now turn to the break-up of the IIP growth for July 2023 with a 3-month comparison.

July 2023 sees IIP growth across mining, manufacturing, and electricity

IIP is normally a basket of products but it is broadly classified into 3 broad buckets, viz. mining, manufacturing, and electricity. The table below captures the gist of the July 2023 IIP growth and compares with the previous 3 months. Here is the product-wise break-up.

Product Basket	Weights	Apr-23	May-23	Jun-23	Jul-23
Manufacture of food products	5.30	3.8	0.1	-3.0	5.2
Manufacture of beverages	1.04	-7.6	-4.4	1.6	3.9
Manufacture of tobacco products	0.80	-21.4	-4.9	-17.0	0.6
Manufacture of textiles	3.29	-7.4	-3.2	-0.1	0.9
Manufacture of wearing apparel	1.32	-28.8	-20.9	-23.3	-22.5
Manufacture of leather and related products	0.50	-8.2	1.6	7.9	-4.0
Manufacture of wood products	0.19	-15.8	-12.7	-12.5	-12.1
Manufacture of paper products	0.87	-7.6	-9.8	-1.8	-2.4
Printing and reproduction of recorded media	0.68	5.2	0.6	-10.9	-9.8
Manufacture of coke and refined petroleum products	11.77	-1.5	2.6	3.2	4.2
Manufacture of chemical products	7.87	2.7	-1.5	-2.5	-7.4
Manufacture of pharmaceuticals	4.98	24.0	20.9	4.1	12.0
Manufacture of rubber and plastics products	2.42	1.3	7.1	0.9	0.2
Manufacture of other non-metallic mineral products	4.09	7.1	10.0	4.9	6.5
Manufacture of basic metals	12.80	12.1	9.0	15.1	12.8
Manufacture of fabricated metal products	2.65	-1.9	4.4	-4.7	2.2
Manufacture of computer, electronic and optical products	1.57	-12.0	-5.7	-32.3	-16.8
Manufacture of electrical equipment	3.00	16.5	8.1	10.8	3.1
Manufacture of machinery and equipment	4.77	8.2	9.7	5.5	4.7
Manufacture of motor vehicles, trailers, and semi-trailers	4.86	3.8	13.4	7.6	8.9
Manufacture of other transport equipment	1.78	11.6	10.9	-0.1	-2.5
Manufacture of furniture	0.13	-29.0	-13.3	-12.0	-11.1
Other manufacturing	0.94	-4.5	-0.5	-10.3	6.3
MINING	14.37	5.1	6.4	7.6	10.7
MANUFACTURING	77.63	5.5	5.8	3.1	4.6
ELECTRICITY	7.99	-1.1	0.9	4.2	8.0
OVERALL IIP	100.00	4.6	5.3	3.8	5.7

Data Source: MOSPI

The latest month showing the July 2023 IIP numbers has been shaded for clarity purpose. Here are some of the major takeaways from the IIP break-up of June 2023.

• The higher IIP of 5.7% in July 2023, compared to 3.8% in June 2023, was largely triggered by across the board growth. For instance, Mining output for July 2023 grew at 10.7% and electricity at 8.0% compared to 7.6% and 4.2% respectively in June 2023. However, over the previous month, the manufacturing IIP bounced from 3.1% to 4.6%. Obviously, with manufacturing having a weight of 77.63% in the IIP basket, that predominance of manufacturing is likely to remain and its impact gets magnified.

   

• In the month of June, the products that saw the highest positive growth were categories like basic metals, pharmaceuticals, non-metallic minerals, and food products. The products that saw the sharpest fall in growth on a yoy basis include apparel, computers & electronic products, wood products and furniture. 

Overall, mining and electricity did better than expected in July 2023 but it was the manufacturing segment that provided the big boost, partially due to its weight. Most of the pressure on manufacturing came from sectors that are export oriented like textiles, computers, furniture, textiles etc. The global slowdown has led to companies cutting down on spending and that is hitting the export of Indian goods and services.

Interpreting the annual IIP data so far

The table below captures the IIP growth on an annual basis over the last 4 financial years. The overall IIP product basket is not only broken up in terms of the 3 broad classifications of mining, manufacturing, and electricity, but also on a product-wise basis. The latest fiscal year that FY2023-24 refers to 4 months of cumulative from April to July 2023.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.30	-2.7	5.9	3.8	1.6
Manufacture of beverages	1.04	-25.8	11.5	19.9	-1.9
Manufacture of tobacco products	0.80	-14.3	8.7	-0.6	-11.5
Manufacture of textiles	3.29	-21.3	29.3	-8.7	-2.5
Manufacture of wearing apparel	1.32	-29.9	27.4	-7.4	-23.7
Manufacture of leather and related products	0.50	-18.0	1.3	-5.8	-0.8
Manufacture of wood products	0.19	-19.6	15.1	-0.8	-13.2
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-5.5
Printing and reproduction of recorded media	0.68	-28.0	12.4	23.4	-4.2
Manufacture of coke and refined petroleum products	11.77	-12.2	8.9	5.7	2.1
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-2.3
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	14.7
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	2.4
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	7.2
Manufacture of basic metals	12.80	-5.8	18.6	8.1	12.2
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	0.0
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-18.3
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	9.5
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	7.0
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	8.5
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	4.5
Manufacture of furniture	0.13	-27.9	23.3	16.4	-16.3
Other manufacturing	0.94	-22.5	49.0	-3.0	-2.3
MINING	14.37	-7.8	12.2	5.8	7.3
MANUFACTURING	77.63	-9.6	11.8	4.7	4.8
ELECTRICITY	7.99	-0.5	7.9	8.9	2.9
OVERALL IIP	100.00	-8.4	11.4	5.2	4.8

Data Source: MOSPI (# Apr-23 to Jul-23)

What are the major takeaways that we see in the table above? There are some interesting trends that emerge by looking at a period starting the COVID year and going forward. 

• The sharp full year growth in FY22 was on a very low base since FY21 was a low base year due to the COVID shutdowns. However, FY23 saw the full year IIP growth normalize to 5.25%, while for the first four months of FY24, the cumulative IIP growth stands at 4.8% on an annualized basis. It remains to be seen if the IIP can pick up with a revival in the capital investment cycle evident and its impact on the manufacturing IIP, which has the highest weightage of 77.63% in the IIP basket.

   

• Over the last 2 years, the product segments that have shown consistent growth include beverages, printing & recorded media, motor vehicles, trailers as well as machinery & equipment. However, some sectors turned from positive growth in FY22 to negative growth in FY23 and that trend has continued in FY24 also. These include sectors like textiles, wearing apparel, leather products, pharmaceuticals, and computer electronics. Furniture and wood product exports have suffered in FY24. The trend is clearly against the export oriented sectors, which are facing the brunt of the global slowdown. 

The good news is that manufacturing output has shown a slight improvement in FY24 over FY23 and that can be largely attributed to the fructifying of the PLI schemes and the revival of the capital investment cycle. 

How is the RBI likely to react to the latest IIP data?

The August monetary policy is gone and the RBI has opted to maintain status quo on rates. Since hiking the rates in February 2023, the RBI has held the repo rates at 6.5%. However, the equation has changed in the last 2 months with inflation spiking sharply to 7.44% in July 2023 and relatively high at 6.83% in August 2023.

• What we have seen in the last few months is the RBI focusing its monetary policy on inflation, but not losing sight of growth. In fact, the pause in the rates can be largely attributed to the pressure from the industry bodies, which were worried about the rising interest costs for Indian corporates. With IIP starting to show a manufacturing boost, it looks like the RBI would prefer to err on the side of caution and wait for the October policy before deciding on rate hikes.

   

• The good news in the IIP numbers is that the pressure is purely coming from the global sectors and not from the domestic sectors. The domestic demand continues to be robust and there is not much control that the Indian government or RBI has over global demand. It remains to be seen how RBI interprets this combination of higher than expected inflation and better than expected IIP growth.

In the October 2023 policy, the RBI may still show a predilection to protect the growth engine by keeping status quo on rates. However, post that, the actions of the Fed and the central banks will also come into play. A lot will now predicate on how consumer inflation and IIP growth pan out in India over the next few months of 2023.