Jun-24 IIP falls to 5-month low of 4.24% as manufacturing falters

13 Aug 2024 , 02:44 PM

JUN-24 IIP PULLED DOWN BY MANUFACTURING

The month of June 2024 saw the IIP growth fall from 5.91% in the previous month to a level of 4.24%. To an extent, the supply chain constraints imposed by the Middle East crisis and the fears of weak demand in the US and China led to lower IIP growth in the month of June. Incidentally, June 2024 was the month when the election uncertainty got over and the onus shift to the full budget. What is actually disconcerting is that the base IIP had actually fallen in the corresponding base period of May 2023 to June 2023 from 5.66% to 4.05%. Ideally, this lower base should have been a booster for the IIP growth. But, the fact that IIP growth was still lower, shows that the actual impact on IIP was much sharper the numbers show.

Remember, IIP is always reported with a lag of one-month. So, the IIP for May is reported in mid-July and the IIP for June just got reported in August. The month saw an improvement in the mining output, but manufacturing and electricity output faltered in the month. However, with manufacturing having a weightage of 77.63% in the IIP basket, it obviously had an oversized impact on the overall IIP. Normally, the IIP numbers go through two revisions i.e., after 1 months and after 3 months; and this time both were upgrades. The IIP growth of May 2024 saw the first upgrade of 27 bps from 5.91% to 6.18%. At the same time, the Marcy 2024 IIP also saw a marginal upgrade of 6 bps from 5.41% to 5.47%. These upgrades bode well for June IIP data, when it comes up for first and final revisions.

HIGH FREQUENCY IIP GROWTH TAKES A HIT IN JUNE 2024

The IIP growth that is reported is the yoy growth; which is with reference to the comparable month in the previous year. One shortcoming of the yoy IIP growth is that it only captures the secular trend but ignores the high-frequency short term momentum. In India, it is equally important to understand this high frequency momentum in IIP. The MOM growth in IIP, therefore, captures these short term eccentricities in the data much better. How does the high frequency MOM growth look like for the month of June 2024? Obviously, here we will be looking the components of IIP index with reference to their May 2024 numbers. Here is what we gleaned from the IIP high frequency data for the month of June 2024.

For June 2024, the high frequency growth across mining, manufacturing and electricity was in the negative, so the overall IIP also showed negative IIP traction on a MOM basis. That shows a good deal of pressure in the short term. For June 2024, the high frequency mining IIP was -1.17% lower, the manufacturing IIP was -3.26% lower and the electricity IIP was -2.83% lower. As a result, the overall MOM IIP was also down by -2.98% for the basket overall. The MOM IIP numbers indicate that irrespective of what the longer term growth numbers show, the short term pressure on growth is quite apparent and intense.

MINING, MANUFACTURING, ELECTRICITY –TROIKA SHOW IN JUNE 2024

In the last 3 months, the trend in mining, manufacturing, and electricity have been oscillating. For example, in February 2024, all 3 showed sharply better levels compared to the previous month. However, in March 2024, Manufacturing and Electricity growth was robust, while mining output fell sharply. In May, it was again manufacturing that faltered. In June 2024, manufacturing and electricity showed lower growth while mining IIP growth actually was the saving grace on a yoy basis.

Let us start with mining IIP for June 2024 on yoy basis. The June 2024 mining IIP growth was strong at 10.3%, sharply higher than 6.6% in May 2024. If you look at electricity IIP, it stood at 8.6% in June 2024, sharply lower than 13.7% in May 2024. The other decisive negative trend was in the manufacturing IIP. For the month of June 2024, the manufacturing IIP grew at the rate of just 2.6%, compared to 5.0% in the month of May 2024. As a result, the overall IIP for June 2024 at 4.2% was sharply lower than the May overall IIP growth number of 6.2%. Manufacturing proved to be the show-spoiler in the month of June 2024.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

The broad trends from the IIP are not too attractive in June 2024. Despite the base IIP number between May 2023 and June 2023 shifting lower from 5.66% to 4.05%; the yoy IIP growth in June is 194 bps lower at 4.24%. Much of this slowdown could be attributed to slowdown in construction and infrastructure activities due to a combination of the monsoons and also due to the uncertainty of the elections.

Month	IIP Growth (%)
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	4.39%
Jan-24	4.21%
Feb-24	5.60%
Mar-24	5.47%
Apr-24	4.98%
May-24	6.18%
Jun-24	4.24%

Data Source: MOSPI

There are 2 positive takeaways from the latest IIP data. Firstly, the Red Sea crisis and the disruption of trade routes, are gradually having a diminishing impact on the IIP. This is evident from the fact that some of the export driven manufacturing like furniture and electronics have shown a rapid growth. In fact, they are driving the IIP growth in the last few months, which is quite paradoxical and a contrast to what most of us would imagine. That is also indicative of the fact that the perceived slowdown in global demand is also not really happening. The other positive takeaway is the gradual revival in rural demand; which was highlighted by the rating agencies and we could see it in full flow in the Q1FY25 results. Rural growth was the missing link in the entire IIP growth story and now we have an answer.

JUNE 2024 IIP: MANUFACTURING SUBDUED, BUT POCKETS SHINE

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	Mar-24	Apr-24	May-24	Jun-24
Manufacture of food products	5.3025	-3.3	-12.8	-5.3	3.0
Manufacture of beverages	1.0354	0.6	11.5	8.2	-1.0
Manufacture of tobacco products	0.7985	-18.0	-8.9	4.9	-10.9
Manufacture of textiles	3.2913	-3.0	-1.1	-0.5	-1.7
Manufacture of wearing apparel	1.3225	7.4	14.1	9.8	2.2
Manufacture of leather and related products	0.5021	-9.7	-8.6	1.3	-3.9
Manufacture of wood products	0.1930	3.1	-5.7	1.6	5.4
Manufacture of paper products	0.8724	-0.1	-4.5	4.1	-2.0
Printing and reproduction of recorded media	0.6798	-0.1	-5.4	3.6	-3.9
Manufacture of coke and refined petroleum products	11.7749	0.9	4.9	2.0	-0.8
Manufacture of chemical products	7.8730	1.7	0.8	0.7	0.7
Manufacture of pharmaceuticals	4.9810	17.1	3.0	7.3	-2.9
Manufacture of rubber and plastics products	2.4222	5.5	1.7	-1.2	6.4
Manufacture of other non-metallic mineral products	4.0853	8.2	0.9	0.5	3.1
Manufacture of basic metals	12.8043	8.5	8.4	8.3	4.9
Manufacture of fabricated metal products	2.6549	20.5	10.2	12.3	3.1
Manufacture of computer, electronic and optical	1.5704	0.4	2.4	20.1	10.7
Manufacture of electrical equipment	2.9983	14.7	3.3	15.2	28.4
Manufacture of machinery and equipment	4.7653	2.9	0.3	2.1	1.5
Manufacture of motor vehicles, trailers	4.8573	6.6	11.8	6.6	4.1
Manufacture of other transport equipment	1.7763	26.2	17.4	16.8	8.5
Manufacture of furniture	0.1311	40.5	44.7	33.9	16.0
Other manufacturing	0.9415	-17.1	10.6	-8.6	-12.6
MINING	14.3725	1.3	6.8	6.6	10.3
MANUFACTURING	77.6332	5.9	3.9	5.0	2.6
ELECTRICITY	7.9943	8.6	10.2	13.7	8.6
OVERALL IIP	100.0000	5.5	5.0	6.2	4.2

Data Source: MOSPI

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

• The IIP growth of 4.2% in June 2024, is lower than 6.2% (revised) for May 2024. What is rather disappointing is that the June IIP number is on a much lower base, so actually the IIP slowdown is more intense than what we see. Manufacturing growth in the IIP basket is sharply down about 240 bps at 2.6% and that has immensely contributed to the IIP falling sharply in June 2024. That is hardly surprising considering that the manufacturing growth has an imposing 77.6% weightage in the IIP basket.
• In the month of June 2024, the products that saw the highest positive growth were electrical equipment, mining, computer & optical equipment, furniture, rubber & plastic products, wood products and basic metals. What is rather interesting in these data flows is that several of these are export driven. That is an indication that the worst phase of the exports slowdown seen in the last year and half may be finally coming to an end. Some of them have their own reasons. The export of electronics and electrical equipment has got a big boost from the PLI scheme. On the downside, the sectors that are still under pressure in terms of yoy IIP growth are other manufacturing, tobacco products, leather products, and recorded media.

In June 2024, manufacturing and electricity took a sharp hit in the IIP basket, while mining was the star performer. Mining is largely policy driven and the new government formation has been a boon for the mining sector. For electricity, it is more about cyclical demand while for manufacturing, the lag effect will take some time to diminish.

READING BETWEEN THE LINES OF ANNUALIZED DATA

The latest fiscal year FY25 just has three months of data for April, May, and June; so cumulative numbers would need some more time before they can be meaningfully extrapolated for annual trends. The cumulative IIP growth for FY25 at 5.2% (3 months), was lower than FY24 at 6.0%, and close to FY23 at 5.5%. The fiscal year FY22 may not be comparable due to the low base of the previous year. FY25 picture should evolve clearly in the coming months.

Product Basket	Weights	2021-22	2022-23	2023-24	2024-25
Manufacture of food products	5.3025	5.9	3.8	1.7	-5.5
Manufacture of beverages	1.0354	11.5	23.9	5.7	6.0
Manufacture of tobacco products	0.7985	8.7	1.4	-7.5	-4.9
Manufacture of textiles	3.2913	29.3	-8.4	0.2	-1.0
Manufacture of wearing apparel	1.3225	27.4	0.2	-13.8	8.2
Manufacture of leather and related products	0.5021	1.3	-3.9	-0.6	-3.7
Manufacture of wood products	0.1930	15.1	1.1	-5.6	0.6
Manufacture of paper and paper products	0.8724	17.7	0.8	-3.5	-0.9
Printing and reproduction of recorded media	0.6798	12.4	24.5	-1.0	-1.9
Manufacture of coke and refined petroleum	11.7749	8.9	6.1	4.0	2.0
Manufacture of chemicals and chemical products	7.8730	4.3	7.1	-1.6	0.7
Manufacture of pharmaceuticals	4.9810	1.3	-2.0	9.0	2.5
Manufacture of rubber and plastics products	2.4222	8.0	0.7	4.5	2.2
Manufacture of other non-metallic mineral products	4.0853	20.1	7.2	6.7	1.5
Manufacture of basic metals	12.8043	18.6	8.1	11.7	7.2
Manufacture of fabricated metal products	2.6549	10.9	-0.5	8.4	8.5
Manufacture of computer, electronic and optical	1.5704	11.1	-2.8	-10.5	11.1
Manufacture of electrical equipment	2.9983	12.2	0.9	7.8	15.4
Manufacture of machinery and equipment	4.7653	11.0	11.3	6.8	1.3
Manufacture of motor vehicles and trailers	4.8573	18.4	22.1	11.6	7.4
Manufacture of other transport equipment	1.7763	1.6	17.5	14.5	14.0
Manufacture of furniture	0.1311	23.3	21.0	-5.9	30.5
Other manufacturing	0.9415	49.0	-0.7	-5.5	-3.3
MINING	14.3725	12.2	5.7	7.9	7.9
MANUFACTURING	77.6332	11.8	5.0	5.5	3.8
ELECTRICITY	7.9943	7.9	9.2	7.2	10.9
OVERALL IIP	100.0000	11.4	5.5	6.0	5.2

Data Source: MOSPI (FY25 is 2-Months data)

The last column (which has been shaded) refers to data for FY25; but then it is for just 3 months and that kind of data has limited value in extrapolating the annual trend. We would need, at least, 5-6 months of data to get meaningful cues of the full year growth. By then, the monsoon data will also be out, so there would be clarity on the agricultural front too. FY24 did have some positive takeaways, but there are some quick readings for FY25 from the 3 months data. IIP growth at 5.2% appears to be on target but slightly under pressure. Hopefully, with the election uncertainty gone, that should change. Also, export driven sectors like electronics, apparel and furniture are showing very good traction and could be a big trigger for an output boost in the coming months. Overall, the cumulative IIP in FY25 appears to be well poised to get upgraded to higher levels in the months to come.

WILL THE IIP DATA INFLUENCE OCTOBER MONETARY POLICY?

IIP is not a data point that the RBI would like to acknowledge as a key driver of policy rate. It would be naïve to believe that the RBI would not be looking at IIP, but they would be looking at a combination of the IIP and the CPI inflation data. The latest data announced on August 12, 2024 actually makes a dual case for rate cuts by the RBI in its upcoming meeting in October 2024. For instance, the CPI inflation for July has come down sharply to 3.54% which is a good 46 bps lower than the RBI target for inflation. However, a few swallows do not make a summer and the RBI may need additional data points.

The story is that if the IIP is subdued and the inflation is low, the RBI has the perfect setting to cut rates aggressively. A lot would still depend on what the Fed does and what the Fed talks in its September meeting. The setting for a rate cut is surely there!