October 2023 IIP surges to 11.74%, as Power and Manufacturing race ahead

13 Dec 2023 , 09:09 AM

IIP growth surges in October 2023

For the second time in the last 3 months, IIP growth was in double digits. In September 2023, the IIP growth had dipped to 5.83% from 10.34% in August. However, October has seen IIP growth bounce back to 11.74%. Incidentally, October 2023 reading was the highest level of IIP growth since June 2022. However, June 2022 was a month of elevated IIP due to a weak base. In a sense, there was an advantage for IIP in October 2023 since October 2022 had seen negative IIP growth, so the base was low. However, the momentum of the last few months shows that is it more about manufacturing momentum and less about base effect. For October 2023, all the 3 components of IIP viz. mining, manufacturing and electricity showed double digit growth, and that has given a real boost to the overall IIP figure.

Mining, manufacturing, and electricity – sharply better

How did the components of IIP compare in October versus September. Mining was slightly higher at 13.1% in October 2023, compared to 11.5% in September 2023. However, the surge in manufacturing was a lot more decisive as it jumped to 10.4% in October 2023 compared to just 4.9% in September 2023. The third component of electricity also saw a sharp surge in October 2023 to 20.4% from just 9.9% in September 2023. The impact of manufacturing gets magnified on 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 October 2023 IIP growth just got reported in the middle of December 2023. Let us first look at the IIP figures month-wise over the last one year. 

IIP growth sharply bounces back in October 2023

The table captures the monthly IIP growth number captured on a yoy basis. The base effect did play a key role in the IIP growth surging to 11.74% in October 2023, since the base month of October 2022 had negative growth in IIP.

Month	IIP Growth (%)
Oct-22	-4.07%
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	10.34%
Sep-23	6.20%
Oct-23	11.74%

Data Source: MOSPI

In last 3 months, IIP growth has been in double digits twice; in the months of August and October 2023. Incidentally, both these months had a negative base and hence we may have to look at IIP growth on a more normalized based to decipher the IIP growth traction. If one were to look at the components of IIP, it is clear that the maximum pressure on IIP is still coming from export oriented sectors like textiles, jute, and paper; where the exports have taken a serious hit in the midst of weak demand stemming from the global uncertainty. Let us now move to the IIP revisions and the direction and magnitude of revisions.

The IIP numbers typically 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 July 2023 IIP underwent final upward revision of 15 basis points from 6.03% to 6.18%. At the same time September 2023 IIP also underwent a positive revision of 37 basis points from 5.83% to 6.20%. These upward revisions are positive since they give the hope that even the latest October IIP and the final IIP estimate for August 2023 can be much higher. 

October 2023 IIP basket: what grew, and what didn’t 

IIP is a basket of products but it is classified into 3 buckets, viz. mining, manufacturing, and electricity. The table below captures the gist of the October 2023 IIP growth and compares with the previous 3 months. 

Product Basket	Weights	Jul-23	Aug-23	Sep-23	Oct-23
Manufacture of food products	5.30	7.4	4.4	0.3	6.3
Manufacture of beverages	1.04	7.3	12.6	9.7	13.2
Manufacture of tobacco products	0.80	-0.6	7.4	-4.7	0.4
Manufacture of textiles	3.29	1.2	1.6	3.8	6.5
Manufacture of wearing apparel	1.32	-22.7	-17.1	-18.2	-5.0
Manufacture of leather and related products	0.50	-4.1	3.1	-0.7	16.5
Manufacture of wood products	0.19	-11.5	-2.9	3.3	-1.7
Manufacture of paper products	0.87	-3.3	-0.4	-3.2	3.8
Printing and reproduction of recorded media	0.68	-7.9	3.4	-4.1	3.3
Manufacture of coke and refined petroleum products	11.77	4.4	10.2	2.7	2.4
Manufacture of chemical products	7.87	-6.3	-3.9	-5.7	4.4
Manufacture of pharmaceuticals	4.98	12.2	16.8	6.8	11.2
Manufacture of rubber and plastics products	2.42	1.4	4.2	2.0	8.1
Manufacture of other non-metallic mineral products	4.09	5.6	15.3	4.7	12.9
Manufacture of basic metals	12.80	14.7	14.6	13.9	11.9
Manufacture of fabricated metal products	2.65	-3.2	23.2	9.9	18.5
Manufacture of computer, electronic and optical products	1.57	-16.6	-8.7	-8.7	-5.3
Manufacture of electrical equipment	3.00	3.1	17.7	8.0	13.2
Manufacture of machinery and equipment	4.77	5.5	13.0	5.0	26.1
Manufacture of motor vehicles, trailers, and semi-trailers	4.86	8.6	12.0	11.4	24.4
Manufacture of other transport equipment	1.78	-2.5	8.2	7.1	26.4
Manufacture of furniture	0.13	-10.6	-23.8	-20.0	-7.2
Other manufacturing	0.94	7.3	-4.6	-12.8	30.9
MINING	14.37	10.7	12.3	11.5	13.1
MANUFACTURING	77.63	5.3	9.3	4.9	10.4
ELECTRICITY	7.99	8.0	15.3	9.9	20.4
OVERALL IIP	100.00	6.2	10.3	6.2	11.7

Data Source: MOSPI

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

• The IIP growth of 11.74% in October 2023, compared to the revised estimate of 6.20% in September 2023, was largely influenced by manufacturing and electricity. For instance, Mining output for October 2023 grew at 13.1% compared to 11.5% in September, which can be classified as moderate growth. However, the growth rates of manufacturing and electricity doubled over the previous month were robust. For instance, manufacturing saw yoy growth pick up to 10.4% in October 2023 from 4.9% in September 2023. At the same time, electricity growth picked up to 20.4% in October 2023 compared to 9.9% in September 2023. Obviously, with manufacturing having a weightage of 77.63% in the IIP basket, its impact on the IIP got magnified and that is what IIP gravitated towards.

   

• In the month of August 2023, the products that saw the highest positive growth were categories like transport equipment, plant & machinery, motor vehicles, fabricated metal products, leather products, beverages, and basic metals. These are largely driven by domestic demand. The products that saw the sharpest fall in IIP on a yoy basis include furniture, computer products, wearing apparel and wood products (the same suspects as last month). However, it must be said that the typical export basket pressure is showing signs of receding in October 2023, as compared to previous months.

While the negative base helped the surge in IIP, the robust growth did come amidst severe global headwinds with exports being hit by weak global demand. The IIP growth has purely come from inward looking and India-specific sectors. 

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

The table below captures the IIP growth on an annual basis over the last 4 financial years. The overall IIP product basket is not only broken up in terms of the 3 broad classifications of mining, manufacturing, and electricity, but also on a granular product-wise basis. The latest fiscal year that FY2023-24 refers to 7 months cumulative data from April to October 2023.

Product Basket	Weights	2020-21	2021-22	2022-23	2023-24#
Manufacture of food products	5.30	-2.7	5.9	3.8	2.9
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	-6.7
Manufacture of textiles	3.29	-21.3	29.3	-8.7	0.2
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	1.7
Manufacture of wood products	0.19	-19.6	15.1	-0.8	–8.0
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-3.2
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	3.3
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-1.9
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	13.5
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	3.6
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	8.6
Manufacture of basic metals	12.80	-5.8	18.6	8.1	13.4
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	6.3
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-13.8
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	10.9
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	10.3
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	11.5
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	8.5
Manufacture of furniture	0.13	-27.9	23.3	16.4	-16.7
Other manufacturing	0.94	-22.5	49.0	-3.0	-0.3
MINING	14.37	-7.8	12.2	5.8	9.4
MANUFACTURING	77.63	-9.6	11.8	4.7	6.4
ELECTRICITY	7.99	-0.5	7.9	8.9	8.0
OVERALL IIP	100.00	-8.4	11.4	5.2	6.9

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

The last column refers to data for the first 7 months of FY24; although past experience has been that annualization of 7 months data tends to be fairly reflective.

• 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 7 months of FY24, cumulative IIP growth stands at 6.9%. It is early to say if IIP can pick up, but there are positive signals like revival in capital investment cycle and aggressive government capex spending. 

   

• 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 7 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 has hit exports. 

For the first 7 months data, annualized IIP for FY24 is already 170 bps better than FY23. The more gratifying news is that manufacturing IIP for FY24 is 170 bps above the comparable figure of FY23. This can be attributed to the trickle-down effect of the PLI schemes and the revival of capital investment cycle. Global headwinds remain the X-factor.

Will the surge in IIP make the RBI cautious on staying dovish

In the latest December 2023 monetary policy, the RBI held status quo for the fifth time in a row. Incidentally, the RBI has also hiked the GDP growth estimate for FY24 by 50 bps to 7.0% while keeping the inflation number static at 5.4%. Will higher IIP trigger rate hikes?

• What we have seen in the last few months is RBI focusing monetary policy on inflation, without losing sight of growth. The sustained pause in rates can be attributed to pressure from industry bodies, worried about rising interest costs. The surge in IIP in October was more due to the negative base effect, so the RBI is unlikely to be overly worried about its neutral stance at this juncture.

   

• What works for the RBI is that, domestic growth factors have offset global headwinds and IIP is still robust. RBI has really no reasons to spoil the growth party; when inflation is already tapering in India. RBI is unlikely to tinker with rates unless it sees a decisive shift in inflation either ways. Here we talk of structural shifts and not seasonal cycles.

RBI may be worried once the surge in growth triggers consumption, credit, and inflation. That is far from  the current picture. For now, the RBI will use the IIP as an observation data rather than a decision point. For now, it looks like status quo for the RBI.