November 2023 IIP tapers to 2.40%, as Diwali base effect depresses IIP

15 Jan 2024 , 11:19 AM

Diwali base effect plays truant with IIP growth

The Diwali gap base effect came to haunt the IIP growth for November 2023. Let us spend a moment on this Diwali base effect to understand the sudden fall in IIP growth in November. Remember, IIP growth was in double digits in 2 out of the last 3 months, so a sharp fall to 2.4% is hard to explain. It has to do with the Diwali base effect. Here is how it goes. In 2022, the Diwali was in October so the output surge showed in November.  That is why, you saw the IIP growth surging from -4.07% in October 2022 to 7.58% in November 2022. 

However, in 2023, the Diwali was in November, so that impact should only show in December 2023 data. Hence November 2023 has a high base of 2022 and a low current month IIP figure, leading to the lower than expected IIP figure. Experts believe that if the two months are averaged, then the IIP growth for November 2023 should be closer to a more representative and robust 7%. But these are accounting differences, and the hopes is that things will get back to normal in December 2023. 

Mining, manufacturing, electricity – face the base effect folly

We have explained the dissonance of the base effect in the opening para and that is the reason for this sharp fall in IIP for November 2023 to just 2.40%. Let us also look at the components. Mining output halved to 6.8% in November 2023, from 13.1% in October 2023. The fall was the most significant in manufacturing and also decisive as it slumped to 1.2% in November 2023 compared to 10.2% in October 2023. The third component of electricity also saw a sharp fall in November 2023 to 5.8% from a high of 20.4% in October 2023. 

The impact of manufacturing gets magnified on the IIP, since manufacturing has a weight of 77.63% in the overall IIP basket. The general practice is to report IIP with a lag of one month; which means the November 2023 IIP growth just got reported in the middle of January 2024. As a result, the combined IIP for the month of November fell to just 2.40% in November 2023, compared to a relatively robust 11.6% in the month of October 2023. Let us first look at the IIP figures month-wise over the last one year. 

IIP growth slides in 2023 on base effect

The table captures monthly IIP growth number on yoy basis. The base IIP number between October 2022 and November 2022 shifted from -4.07% to 7.58%; causing the fall in IIP.

Month	IIP Growth (%)
Nov-22	7.58%
Dec-22	5.12%
Jan-23	5.81%
Feb-23	6.01%
Mar-23	1.95%
Apr-23	4.61%
May-23	5.66%
Jun-23	4.05%
Jul-23	6.18%
Aug-23	10.87%
Sep-23	6.20%
Oct-23	11.58%
Nov-23	2.40%

Data Source: MOSPI

In the 3 months prior to the November, IIP growth had been in double digits twice. However, both these months had a negative base and hence we may have to look at IIP growth on a more normalized base to decipher the traction. If one were to look at the components of IIP, it is clear that the maximum pressure on IIP is coming from export oriented sectors like textiles, chemicals jute, computers, and paper; where exports have taken a serious hit amidst weak global demand. 

What about IIP revisions? The IIP numbers go through two revisions. A month after the IIP announcement, it goes through the first revision and 3 months later it goes through the final revision. The August 2023 IIP underwent final upward revision of 53 basis points from 10.34% to 10.87%. The October 2023 IIP first revision lowered IIP estimates by 16 basis points to 11.58%. The revisions have been a mixed affair in November 2023.

November 2023 IIP Product basket: what grew, and what didn’t 

IIP is a basket of products classified into mining, manufacturing, and electricity. The table below captures comparative IIP growth for last 4 months.

Product Basket	Weights	Aug-23	Sep-23	Oct-23	Nov-23
Manufacture of food products	5.30	4.9	0.3	7.3	-3.7
Manufacture of beverages	1.04	12.6	9.7	9.7	8.5
Manufacture of tobacco products	0.80	7.4	-4.7	0.4	-15.0
Manufacture of textiles	3.29	1.8	3.8	6.9	-3.7
Manufacture of wearing apparel	1.32	-17.0	-18.2	-5.4	-20.5
Manufacture of leather and related products	0.50	3.2	-0.7	18.5	-16.2
Manufacture of wood products	0.19	-3.0	3.3	-0.2	-14.9
Manufacture of paper products	0.87	-0.5	-3.2	2.8	-3.3
Printing and reproduction of recorded media	0.68	3.2	-4.1	3.6	-2.2
Manufacture of coke and refined petroleum products	11.77	10.2	2.7	2.4	14.2
Manufacture of chemical products	7.87	-3.9	-5.7	4.2	-3.9
Manufacture of pharmaceuticals	4.98	17.2	6.8	11.3	-3.0
Manufacture of rubber and plastics products	2.42	4.5	2.0	6.6	1.7
Manufacture of other non-metallic mineral products	4.09	15.0	4.7	13.0	-2.8
Manufacture of basic metals	12.80	16.9	13.9	11.9	7.2
Manufacture of fabricated metal products	2.65	24.2	9.9	19.2	-5.2
Manufacture of computer, electronic and optical products	1.57	-8.8	-8.7	-7.4	-25.0
Manufacture of electrical equipment	3.00	18.0	8.0	13.3	-16.8
Manufacture of machinery and equipment	4.77	12.8	5.0	25.2	-0.9
Manufacture of motor vehicles, trailers, and semi-trailers	4.86	12.1	11.4	24.7	9.2
Manufacture of other transport equipment	1.78	8.2	7.1	23.3	9.8
Manufacture of furniture	0.13	-20.6	-20.0	-6.8	-30.5
Other manufacturing	0.94	-4.7	-12.8	30.7	-14.8
MINING	14.37	12.3	11.5	13.1	6.8
MANUFACTURING	77.63	10.0	4.9	10.2	1.2
ELECTRICITY	7.99	15.3	9.9	20.4	5.8
OVERALL IIP	100.00	10.9	6.2	11.6	2.4

Data Source: MOSPI

The last column showing the latest November 2023 IIP numbers; and that has been shaded for clarity. Here are some of the major takeaways.

• The IIP growth of 2.40% in November 2023, compared to 11.58% in October 2023, was largely influenced by the base effect. At a broad level, there was a sharp lowering in all the 3 major components. For instance, Mining output for November 2023 fell to 6.8% from 13.1%; Manufacturing fell from 10.2% to 1.2% and Electricity from 20.4% to 5.8%. If you look at the 3 components and IIP overall for November; the figures are not only lower than October but also lower than average of previous 3 months. Manufacturing with weightage of 77.63% in the IIP basket, is what the IIP gravitates towards.

   

• In the month of August 2023, the products that saw the highest positive growth were coke & refined petroleum products, transport equipment, motor vehicles, beverages, basic metals, and rubber & plastic products. These are driven by domestic demand. The products that saw the sharpest fall in IIP include furniture, computer products, wearing apparel, leather products, tobacco products and wood products (same suspects as last month). However, if you cancel the base effect, the typical export basket pressure shows signs of receding in November 2023.

While the surge in base led to the sharp fall in IIP, the manufacturing growth is expected to normalize in the coming month. IIP growth has come from India-specific sectors.

How we read the annual IIP data for FY24 (Apr-Nov)

The table below captures the IIP growth on an annualized basis over last 4 financial years. The IIP granular product basket is presented; along with a consolidated view. The latest fiscal year that FY2023-24 refers to 8 months cumulative data from April to November 2023.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.30	-2.7	5.9	3.8	2.0
Manufacture of beverages	1.04	-25.8	11.5	19.9	4.7
Manufacture of tobacco products	0.80	-14.3	8.7	-0.6	-7.7
Manufacture of textiles	3.29	-21.3	29.3	-8.7	-0.3
Manufacture of wearing apparel	1.32	-29.9	27.4	-7.4	-20.2
Manufacture of leather and related products	0.50	-18.0	1.3	-5.8	-0.3
Manufacture of wood products	0.19	-19.6	15.1	-0.8	-8.7
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-3.4
Printing and reproduction of recorded media	0.68	-28.0	12.4	23.4	-1.9
Manufacture of coke and refined petroleum products	11.77	-12.2	8.9	5.7	4.6
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-2.2
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	11.1
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	3.7
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	7.1
Manufacture of basic metals	12.80	-5.8	18.6	8.1	12.9
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	5.0
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-15.2
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	7.1
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	8.9
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	11.3
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	8.4
Manufacture of furniture	0.13	-27.9	23.3	16.4	-17.9
Other manufacturing	0.94	-22.5	49.0	-3.0	-1.9
MINING	14.37	-7.8	12.2	5.8	9.1
MANUFACTURING	77.63	-9.6	11.8	4.7	5.8
ELECTRICITY	7.99	-0.5	7.9	8.9	7.7
OVERALL IIP	100.00	-8.4	11.4	5.2	6.4

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

The last column refers to data for the first 8 months of FY24; although that is long enough to extrapolate the full-year picture.

• How does FY24 look, compared to FY22 and FY23. To be fair, FY22 was on a very low base since FY21 was the year of COVID shutdowns. Hence it is not comparable. FY23 saw full year IIP growth normalize to 5.2%, while for first 8 months of FY24, cumulative IIP growth stands at 6.4%. It is early to say if IIP can pick up, but there are positive signals like revival in capital investment cycle and government capex spending, overflowing order books for capital goods companies and a sharp revival in core sector growth. 

   

• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth. IIP growth stems from sectors like pharmaceuticals, basic metals, electrical equipment, plant & machinery as well as motor vehicles. This has been the good news for manufacturing IIP in the first 8 months of FY24. What about the negative triggers. Pressure has come in FY24 from wearing apparel, computer & electronics, furniture, and tobacco products. No prizes for guessing; the common link is that these are export products; where weak global demand hit exports. 

For FY24 so far, annualized IIP for FY24 is 120 bps better than FY23. The more gratifying news is that manufacturing IIP for FY24 is 110 bps above FY23. This can be attributed to the trickle-down effect of the PLI schemes and the revival of capital investment cycle. 

What does higher inflation and lower IIP mean for the RBI

In the December 2023 monetary policy, the RBI held status quo on rates for the fifth time in a row. Incidentally, RBI hiked the GDP growth estimate for FY24 by 50 bps to 7.0% while keeping the inflation number static at 5.4%. What happens now?

• In the latest month data announced on January 12, 2024, the December inflation at 5.69% is 13 bps higher than November, while the November IIP at 2.40% is sharply lower than 11.58% in October. RBI may have informally called off rate hikes; but question is whether rate cuts can happen. It looks unlikely in the first half of 2024, due to the higher than expected inflation. IIP fall may not be too material due to the differential base effect and hence RBI may take that data with a pinch of salt.

   

• What works for the RBI is that, domestic growth factors have offset global headwinds and IIP is robust at an annualized level. The only concern for the RBI would be inflation, and the main reason, once again, is food inflation. Year 2023 has not been too great for Kharif and Rabi and that is showing its impact on inflation numbers. Incidentally, the higher than expected inflation and lower than expected IIP may impel the RBI to just maintain status quo for now and evaluate data points as it comes along.

There is an interim budget coming up on February 01, 2024 and there is the all-important general election coming up just ahead of the Kharif season. Clearly, at this point, the considerations at a macro level will be much beyond just inflation and IIP growth.