May 2023 IIP bounces to 5.22%, as manufacturing output jumps

13 Jul 2023 , 09:37 AM

Of course, IIP growth is reported with a lag of one month, but the message is still the same. It may be recollected that between November 2022 and February 2023, the IIP had maintained itself at a median level of 5%. However, in March 2023, there was a sharp fall in IIP to 1.75%, largely led by a fall in manufacturing as global slowdown concerns translated into weak exports. However, IIP bounced back in April 2023 and this time it was led by manufacturing. For May 2023, the IIP growth stood at 5.22%; now above the 5% median and manufacturing showing a robust bounce.

If the low base of April 2022 of 6.66% had helped the yoy inflation in April 2023, there was no such relief in May 2023. That is because, the base IIP growth in May 2022 was at a whopping 19.72%. Despite that high base, IIP in May 2023 has grown at 5.22%, which doubles the flavour of the achievement. Going ahead, the base effect will taper, so IIP should logically get a boost in the coming months. IIP growth tends to be very vulnerable to the base effect.

IIP bounces to 5.22% in May 2023 from March lows

IIP is normally announced with a lag of one month; which means the April IIP number gets reported in mid-June. For the month of May 2023, the growth in mining and manufacturing were robust but growth in electricity generation was relatively tepid. Power demand has been at record highs this year and that has pushed power units to operate at full capacity. 

Month	IIP Growth (%)
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	6.01%
Mar-23	1.75%
Apr-23	4.46%
May-23	5.22%

Data Source: MOSPI

IIP revisions continue to be favourable for May 2023

The general practice is that, 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 additional data flows which take time to reach the central database and hence it is considered more reflective of the true picture. What is important is that the revisions (depending on whether it is positive or negative) gives a broad guidance for IIP revisions of the current and future months.

What are the IIP revisions we saw in May 2023 data? The February 2023 IIP went through final revision while April 2023 IIP underwent its first revision; and both were upward. The first revision for April 2023 is 22 bps higher from 4.24% to 4.46%. In addition, the final revision of February 2023 IIP is higher by 45 bps from 5.56% to 6.01%. Overall, the revisions have been positive and this does raise hopes of further upgrades in May 2023 also.

Sectoral break-up of IIP growth in May 23 and for FY24

Let us first look at the break-up of the IIP growth for May 2023 in terms of the 3 key components of IIP viz. mining, manufacturing, and electricity. Mining growth for May 2023 was strong at 6.4% compared to 5.1% in April 2023. Manufacturing grew by a healthy 5.7% in May 2023 compared to 4.9% in April 2023. Finally, Electricity grew by 0.9% in May 2023 compared to a contraction of -1.1% in April 2023. A broad based recovery led to overall IIP growth improving to 5.22% in May 2023. Of course, manufacturing dominates due to its 77.63% weight in the IIP basket.

Let us now turn to the break-up of the IIP growth for FY24 in terms of the 3 key components of IIP viz. mining, manufacturing, and electricity. FY24 (Apr-May 2023) has only 2 months data, but with each passing month, the credibility of this cumulative picture will keep building up. Mining growth for FY24 was 5.8%, lower than 9.7% in in the corresponding period last year. For FY24 till date, the manufacturing growth stands at 5.5% and electricity growth at -0.1%, still in the negative for FY24. This number will build up credibility and predictive value as the number of months data increases.

A quick look at the leaders and laggards of the IIP basket

IIP growth of +5.22% for May 2023 is sharply higher compared to April 2023, and above the median IIP growth of 5% between November 2022 and February 2023. Most of the high frequency data points like GST collections, PMI index, freight and e-way bills are still robust; so, the undertone for June and July also look extremely positive. Let us first focus on the positive triggers for IIP in May 2023. Products that triggered the positive surge in IIP for the month include Pharmaceuticals (+20.9%), motor vehicles (+13.4%), transport equipment (+10.9%), Mineral Products (+10.2%), basic metals (+9.6%), electrical equipment (+8.6%) and rubber & plastic products (+6.3%).

Now for the IIP depressants, and there were a good many of them with negative growth. Among the key items that pulled down IIP growth in May 2023 were apparel (-20.9%), furniture (-20.4%), wood products (-12.7%), paper products (-8.6%) and electronic products (-5.7%). If you look at the mix of the IIP depressants, it is a clear pointer towards the pressure on the exports driven segments; indicative of the global uncertainty and recession fears; especially amidst rising probability of global recession.

Let us also take a quick look at the use-based perspective for May 2023? In terms of user groups, Primary Goods grew 3.5%, Capital Goods grew 8.2%, Intermediate goods grew 1.6% and infrastructure goods grew by 14.0%. Consumer durables demand expanded by 1.1% while consumer non-durables expanded by 7.6%. Not only is this data indicative of a revival in consumer demand, but it is also indicative of greater investments happening in the capital cycle, which is already showing nascent signs of a revival.

Why high frequency IIP is still the key metrics

We can break up the 5.22% yoy IIP growth for May 2023 into mining, manufacturing, and electricity. However, the data is still yoy, which makes it vulnerable to the base effect. In reality, it is the high frequency month-on-month growth that gives a clear picture of short-term momentum in IIP basket. The table below captures the sequential IIP performance of May 2023 over April 2023 in the last column.

Weight	Segment	IIP Index May-22	IIP Index May-23	IIP Growth Over May-22	IIP Growth (HF) Over Apr-23
0.1437	Mining	120.40	128.10	+6.40%	+4.49%
0.7764	Manufacturing	134.60	142.30	+5.72%	+5.72%
0.0799	Electricity	199.90	201.60	+0.85%	+4.84%
1.0000	Overall IIP	137.80	145.00	+5.22%	+3.20%

Data Source: MOSPI (HF refers to high frequency)

The high frequency MOM shift 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 saw a bounce back only to again slip into the negative in the month of April. In May 2023, the high frequency IIP growth has again turned into positive territory at 3.20%. In short, high frequency data has been positive in 4 of the last 6 months and that is a strong positive signal of data resilience. That is also ratified by high frequency data points like e-way bills, GST collections and PMI manufacturing.

How will the RBI MPC view this IIP data?

This question becomes important since the RBI has been on a rate pause since February, which was the last rate  hike. April and June policies had seen a pause in rates.

• One thing we have seen in the last few months is the RBI focusing its monetary policy on inflation and less on growth. Since IIP is now back to averaging above 5%, the focus would still be on inflation which has bounced to 4.81% in the latest month.

   

• The strong data coming from the high frequency IIP shows that the tapering of bond yields has reduced the cost of funds and that is surely helping industry. That was something the industry had been demanding for some time.

The good news is that the IIP numbers have bounced back sharply in the last 2 months from the March lows. However, the RBI would still be wary of the global demand factor, on which it has limited control. For now, the RBI monetary policy would continue to be guided by inflation concerns on one side and recession worries on the other. The true picture of Indian monetary policy trajectory, perhaps, likes somewhere in between. The RBI tightrope walk will try to balance these centrifugal pressures.