May-24 IIP spikes to 5.91%, on 70 bps bounce in manufacturing IIP

15 Jul 2024 , 09:49 AM

MAY-24 IIP GETS A BOOST FROM MANUFACTURING

May 2024 saw the IIP growth spike to 5.91% despite the election uncertainty in that period. What is more creditworthy is that, in this period between April 2023 and May 2023, the base actually moved up from 4.61% to 5.66%. Despite the higher base, the IIP growth in May 2024 was up at 5.91% on account of a 100 bps boost to manufacturing output. A bounce in manufacturing is always positive as it has the highest weightage in the IIP basket.

Remember, IIP is always reported with a lag of one-month. So, the IIP for May is reported in mid-July and so on. The month saw an improvement in manufacturing and electricity output, but mining output tapered in the month. However, with manufacturing having a weightage of 77.63% in the IIP basket, it has an oversized impact on the overall IIP. Normally, the IIP numbers go through two revisions i.e., after 1 months and after 3 months. In May, there have been no upgrades or downgrades to previous month IIP figures.

HIGH FREQUENCY IIP GROWTH POSITIVE IN MAY 2024

The IIP growth that is normally reported is the yoy growth; which is compared to the year-ago period. One shortcoming of the yoy numbers is that it only captures the secular trend but ignores the high-frequency short term momentum. The MOM growth in IIP, therefore, captures these short term eccentricities in the data much better. How does the h high frequency MOM growth look like for the month of May 2024? Obviously, here we will be looking the components of IIP index with reference to their April numbers. Here is what we took away from the IIP high frequency data for the month of May 2024.

For May 2024, the high frequency growth across mining, manufacturing and electricity was positive, so the overall IIP also showed positive IIP traction on a MOM basis. That shows positive momentum in the short term. For May 2024, the high frequency mining IIP was 4.28% higher, the manufacturing IIP was 3.81% higher and the electricity IIP was 8.16% higher. As a result, the overall MOM IIP was also up 4.40% for the IIP basket overall. The MOM IIP numbers are gratifying as they come on the back of negative high frequency growth in the previous month. That trend appears to have been arrested.

MINING, MANUFACTURING, ELECTRICITY –THE TROIKA IN MAY 2024

In the last 3 months, the trend in mining, manufacturing, and electricity have been oscillating. For example, in January 2024, it was manufacturing growth that was relatively tepid, while mining and electricity showed robust growth. 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. Ini June 2024, manufacturing and electricity showed higher growth while mining IIP growth tapered by just about 20 bps over April.

Let us start with mining IIP for May 2024 on yoy basis. The May 2024 mining IIP growth was strong at just 6.6%, albeit lower than 6.8% in April 2024. If you look at electricity IIP, it stood at 13.7% in May 2024, sharply higher than 10.2% in April 2024. The positive trend was also sustained by manufacturing, which saw IIP growth in May 2024 taper to 4.6% compared to just 3.9% in April 2024. As a result, the overall IIP for May 2024 at 5.9% was sharply higher than the April growth number. Manufacturing proved to be the IIP booster in May 2024.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

Despite the base IIP number between April 2023 and May 2023 shifting higher from 4.61% to 5.66%; the yoy IIP growth in May is nearly 93 bps higher at 5.91%. In May, there has been no upward revision of the data, as is normally the case. One clue is that the election related slowdown in manufacturing appears to have been overcome in May 2024.

Month	IIP Growth (%)
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	2.47%
Dec-23	4.39%
Jan-24	4.21%
Feb-24	5.60%
Mar-24	5.41%
Apr-24	4.98%
May-24	5.91%

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. In fact, some of the export driven manufacturing like furniture and electronics have shown a rapid growth. That is also indicative of the fact that the perceived slowdown in global demand is also not really happening. The other positive takeaway, and this borne out by recent CRISIL data, is the gradual revival in rural demand. Rural growth was the missing link in the entire IIP growth story and now we have an answer to that. That is the good news.

MAY 2024 IIP BASKET: MANUFACTURING GETS A 70 BPS BOOST

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	Feb-24	Mar-24	Apr-24	May-24
Manufacture of food products	5.3025	3.5	-3.2	-12.8	-5.5
Manufacture of beverages	1.0354	14.9	0.6	11.5	8.1
Manufacture of tobacco products	0.7985	-0.8	-17.9	-8.9	4.9
Manufacture of textiles	3.2913	2.1	-3.4	-1.1	-0.7
Manufacture of wearing apparel	1.3225	-2.7	7.6	14.1	9.8
Manufacture of leather and related products	0.5021	2.0	-9.7	-8.6	1.3
Manufacture of wood products	0.1930	6.9	3.1	-5.7	0.8
Manufacture of paper products	0.8724	5.5	0.1	-4.5	5.1
Printing and reproduction of recorded media	0.6798	5.3	0.7	-5.4	-2.8
Manufacture of coke and refined petroleum products	11.7749	4.1	0.9	4.9	2.0
Manufacture of chemical products	7.8730	2.1	0.2	0.8	-0.5
Manufacture of pharmaceuticals	4.9810	-10.3	17.2	3.0	7.5
Manufacture of rubber and plastics products	2.4222	11.6	6.0	1.7	-0.9
Manufacture of other non-metallic mineral products	4.0853	8.0	8.2	0.9	0.2
Manufacture of basic metals	12.8043	9.1	8.5	8.4	7.8
Manufacture of fabricated metal products	2.6549	14.3	20.3	10.2	12.3
Manufacture of computer, electronic and optical	1.5704	1.6	0.4	2.4	20.1
Manufacture of electrical equipment	2.9983	9.7	14.4	3.3	14.7
Manufacture of machinery and equipment	4.7653	4.8	2.7	0.3	1.7
Manufacture of motor vehicles, trailers	4.8573	11.6	6.5	11.8	6.2
Manufacture of other transport equipment	1.7763	24.4	26.2	17.4	16.8
Manufacture of furniture	0.1311	31.4	32.1	44.7	23.2
Other manufacturing	0.9415	-6.4	-17.1	10.6	-8.6
MINING	14.3725	8.1	1.3	6.8	6.6
MANUFACTURING	77.6332	4.9	5.8	3.9	4.6
ELECTRICITY	7.9943	7.6	8.6	10.2	13.7
OVERALL IIP	100.0000	5.6	5.4	5.0	5.9

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 5.9% in May 2024, is higher than 5.0% in April 2024. However, April is on a much higher base and is prior to revisions; so, the actual positive impact could be higher. Manufacturing growth in the IIP basket is up 70 bps at 4.6% and that has immensely contributed to the IIP boost overall; which his logical considering that manufacturing growth has an imposing 77.6% weightage in the IIP basket.
• In the month of April 2024, the products that saw the highest positive growth were furniture, computer & optical equipment, other transport equipment, electrical equipment, fabricated metals, apparel, beverages, and rubber & plastic products. What is surprising is that several of these are export driven; like apparel, electronics, and furniture. 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. The products that saw the sharpest fall in IIP include food products, printing & recorded media, and textiles. In the case of food products, the slowdown has been due to government imposed constraints on exports and the election related uncertainty. We should get a clearer trend in June data.

In May 2024, manufacturing and electricity got a boost in the IIP basket, while mining tapered marginally. Mining is largely policy driven and some slowdown was inevitable amidst a policy making delay in election period.

READING BETWEEN THE LINES OF ANNUALIZED DATA

The latest fiscal year FY25 just has two months of data for April and May, so cumulative numbers would need some more time before they can be meaningfully extrapolated for annual trends. The cumulative IIP growth for FY25 at 5.4% (2 months), was lower than FY24 at 6.0%, and at par with FY23 at 5.5%. The fiscal year FY22 may not be comparable due to the low base of the previous year. FY25 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	-9.3
Manufacture of beverages	1.0354	11.5	23.9	5.7	9.7
Manufacture of tobacco products	0.7985	8.7	1.4	-7.5	-1.2
Manufacture of textiles	3.2913	29.3	-8.4	0.2	-0.8
Manufacture of wearing apparel	1.3225	27.4	0.2	-13.8	11.7
Manufacture of leather and related products	0.5021	1.3	-3.9	-0.6	-3.5
Manufacture of wood products	0.1930	15.1	1.1	-5.6	-2.3
Manufacture of paper and paper products	0.8724	17.7	0.8	-3.5	0.3
Printing and reproduction of recorded media	0.6798	12.4	24.5	-1.0	-4.2
Manufacture of coke and refined petroleum	11.7749	8.9	6.1	4.0	3.4
Manufacture of chemicals and chemical products	7.8730	4.3	7.1	-1.6	0.2
Manufacture of pharmaceuticals	4.9810	1.3	-2.0	9.0	5.2
Manufacture of rubber and plastics products	2.4222	8.0	0.7	4.5	0.4
Manufacture of other non-metallic mineral products	4.0853	20.1	7.2	6.7	0.5
Manufacture of basic metals	12.8043	18.6	8.1	11.7	8.1
Manufacture of fabricated metal products	2.6549	10.9	-0.5	8.4	11.2
Manufacture of computer, electronic and optical	1.5704	11.1	-2.8	-10.5	11.4
Manufacture of electrical equipment	2.9983	12.2	0.9	7.8	9.0
Manufacture of machinery and equipment	4.7653	11.0	11.3	6.8	1.0
Manufacture of motor vehicles and trailers	4.8573	18.4	22.1	11.6	8.9
Manufacture of other transport equipment	1.7763	1.6	17.5	14.5	17.1
Manufacture of furniture	0.1311	23.3	21.0	-5.9	32.8
Other manufacturing	0.9415	49.0	-0.7	-5.5	1.6
MINING	14.3725	12.2	5.7	7.9	6.6
MANUFACTURING	77.6332	11.8	5.0	5.5	4.3
ELECTRICITY	7.9943	7.9	9.2	7.2	12.0
OVERALL IIP	100.0000	11.4	5.5	6.0	5.4

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

The last column refers to data for FY25; but then it is for just 2 months and that kind of data has limited value in extrapolating the annual trend. We would need, at least, 4-5 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. Fiscal year FY24 did have some positive takeaways, but there are some quick readings for FY25 from the limited 2 months date. IIP growth at 5.4% appears to be on target and should get better with the election uncertainty behind. 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. Leather products are still under pressure, but that is more due to internal issues. Overall, the cumulative IIP in FY25 appears to be well poised for higher levels.

WHAT IIP DATA MEANS FOR AUGUST MONETARY POLICY?

That may be a slightly far-fetched question, but that is something analysts have started asking. With inflation largely under control, is the time not ripe enough for the RBI to undertake pre-emptive rate cuts. Look at the collage of data points. Full year FY24 GDP came in at a robust 8.2% even as the fiscal deficit was kept in check at just 5.6% for FY24. For FY25, the fiscal deficit is pegged at 5.1%, but it could be still better once you consider the impact of the mega dividend of ₹2.11 Trillion paid out by the RBI to the government of India. Traditionally, the RBI has been sensitive to growth, apart from being concerned about inflation and price stability. RBI was pre-emptive in halting rate hikes in February 2023, and now it may be time to give the kicker to IIP and GDP growth through a rate cut.

The IIP of the last few months indicates that IIP is struggling to get out of this range. A rate cut at this juncture can surely do wonders for the India growth story. The question is whether the RBI would do it? Actually, they could. Remember, real rates in India at around 2.10%, against a median figure of between 1% and 1.25%. Secondly, current repo rates are 135 bps above the pre-COVID levels of 5.15%. Rangebound IIP may just be the trigger for the RBI to embark on pre-emptive rate cuts; if not in August, then at least in October 2024!