March 2023 IIP falls to 1.1% due to pressure on manufacturing

13 May 2023 , 09:08 AM

In fact, IIP had touched a high of 5.56% in February 2023; largely led by manufacturing and electricity. These very sectors pulled down the IIP growth in March 2023 to 1.14%. For fiscal year FY23, the IIP growth stood at 5.1%, which is rather impressive on the back of a robust growth shown in FY22.

IIP tapers to 1.14%, despite low base

IIP is normally announced with a lag of one month; which means the March IIP number gets reported in mid-May. The fall in IIP to 1.14% in March 2023 must be seen in the context of the base month IIP. In March 2022, the IIP growth was fairly low at 2.2%, so going ahead, the base effect should play a role in depressing the IIP further. That is something to watch out for, since IIP has a key role to play in overall GDP.

Month	IIP Growth (%)
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%
Feb-23	5.56%
Mar-23	1.14%

Data Source: MOSPI

IIP revisions and how first and second estimates pan out

Typically, each IIP announcement goes through two revisions. The first revision takes place after a month while the second and final revision takes place after 3 months. These revisions factor in a lot of data flows which take time to reach the central database. What is important is that the revisions (depending on whether it is positive or negative) gives some broad guidance for current IIP revisions.

In the current IIP report, December 2022 IIP went through final revision while February 2023 IIP underwent its first revision. The first revision for February 2023 is 22 bps higher from 5.56% to 5.78%. In addition, the final revision of December 2022 IIP is higher by 44 bps from 4.68% to 5.12%. Overall, the revisions have been positive and this does raise hopes that further upgrades in March 2023 also.

How does full year FY23 IIP appear?

The March 2023 IIP got reported in mid-May and that also marks the end of the fiscal year FY23. How does full year IIP look like. The sharp fall in IIP in March to 1.14% led to a sharp lowering of the full year IIP. The annualized IIP stood at 5.5% till February 2023, but at the end of March, the FY23 IIP got revised lower to 5.1%. What were the sectoral drivers for FY23 IIP? 

• For FY23, mining grew at 5.8% yoy. This is much lower than the 12.2% growth evinced by the mining sector in the previous fiscal year FY22.

   

• For FY23, the manufacturing sector grew at 4.5% yoy. This is much lower than the 11.8% growth evinced by the manufacturing sector in the previous fiscal year FY22.

   

• For FY23, electricity grew at 8.9% yoy. This is actually better than the 7.9% growth evinced by the electricity sector in the previous fiscal year FY22.

   

• Now for the consolidated picture. For FY23, overall IIP grew at 5.1% yoy. This is much lower than the 11.4% growth in IIP overall in the previous fiscal year FY22. However, FY22 was on the COVID base of FY21, so FY23 is certainly more laudable.

How did the sectoral break-up look like in March 2023?

Having seen the annual break-up of IIP for FY23, let us focus on the month of March 2023. Mining growth for March 2023 was 6.8%, manufacturing grew by 0.5% while Electricity contracted by -1.6%. Overall growth in IIP for March 2023 was relatively tepid at 1.1%, which is sharply lower than the average of the last couple of months. Compared to February, manufacturing IIP growth was tepid in March 2023 and that made the big difference, considering the 77.63% weight that manufacturing has in IIP basket.

Product leaders and laggards in March 2023 IIP basket

IIP growth of +1.14% for March 2023 is sharply lower compared to December 2022, January 2023, and February 2024. However, most of the high frequency data points like GST collections, PMI index, freight and e-way bills are still robust; so, March 2023 IIP fall may just be temporary. Let us first focus on the positive triggers for IIP in March 2023. Products that triggered the positive surge in IIP for the month include Electrical Equipment (+14.0%), transport equipment (+9.6%), Machinery & equipment (+8.5%), chemicals (+7.0%), basic metals (+5.5%) and Motor Vehicles (+5.3%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in March 2023 were Apparel (-30.7%), computer products (-28.7%), General manufacturing (-14.0%), tobacco products (-10.2%) and furniture (-9.3%). If you look at the mix of the IIP depressants, there is still pressure on the exports driven segments. That is indicative of the global uncertainty and recession fears; especially with the banking crisis aggravating.

How does the use-based perspective look like for March 2023? In terms of user groups, Primary Goods grew 3.3%, Capital Goods grew 8.1%, Intermediate goods grew 1.0% and infrastructure goods grew by 5.4%. However, consumer durables demand contracted -8.4% while consumer non-durables also contracted -3.1%. The damage to consumer demand is something that really cannot be disputed.

A look at the high frequency IIP data for March 2023

We can break up the 1.1% yoy IIP growth for March 2023 into mining, manufacturing, and electricity. But, more importantly, it is the high frequency month-on-month growth that gives a crystal clear picture of short-term momentum in IIP basket. The table below captures the sequential IIP performance of March 2023 over February 2023 in the last column.

Weight	Segment	IIP Index Mar-22	IIP Index Mar-23	IIP Growth Over Mar-22	IIP Growth (HF) Over Feb-23
0.1437	Mining	144.40	154.20	+6.79%	+19.35%
0.7764	Manufacturing	145.30	146.00	+0.48%	+6.41%
0.0799	Electricity	191.00	188.00	-1.57%	+8.05%
1.0000	Overall IIP	148.80	150.50	+1.14%	+8.27%

Data Source: MOSPI (HF refers to high frequency)

The high frequency MOM growth in the IIP is a key indicator that captures the short term triggers and momentum in industrial growth. In February, the high frequency IIP growth had dipped into negative after 3 consecutive months of positive high frequency IIP growth. However, March 2023 has seen a bounce back as high frequency IIP growth has bounced back sharply into positive, across the board. High frequency being positive in 4 of the last 5 months is a strong positive signal. For now, even high frequency indicators seem to agree.

How much credence will RBI give to lower IIP?

This question becomes important after the RBI ordered a pause in rate hikes in its April 2023 meeting. Here are some key points to remember.

• The April 2023 halt in rate hikes had less to do with an improvement in IIP and more to do with giving a message that the RBI was willing to chart its own monetary course. That is perhaps ratified by the 96 bps fall in consumer inflation in April, despite static rates.

   

• Secondly, the RBI was just trying to create a Plan-B with the worsening global banking crisis. Indian banks may be immune but it is sure to hit US demand and that is hitting exports and tech spending. This is a relief for Indian companies.

   

• However, the RBI would be closely watching the sharp fall in IIP in March, although it would take reassurance from the fact that high frequency data points are still very positive. For now, IIP is unlikely to change the RBI thinking on rates. 

To sum it up, the IIP numbers have fallen but that is hardly a call for the RBI to turn dovish. For now, RBI is likely to maintain status quo on rates.