September 2023 IIP normalizes to 5.83%, as manufacturing growth tapers

13 Nov 2023 , 06:49 AM

IIP growth for September 2023 normalized to 5.83% after reporting an intermediate high of 10.34%, in August. Incidentally, the August 2023 IIP level was the highest level of IIP growth since June 2022. However, it must be remembered that June 2022 was a month of elevated IIP due to a weak base. In a sense, there was an advantage for IIP in August 2023 since August 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 just the base effect. For September 2023, the IIP growth of 5.83% is on a base IIP growth of 3.32% in September 2023, which is once again appreciable.

While mining was flat in September compared to August, there was a perceptible fall in growth in manufacturing and electricity. For the month of September 2023, mining stayed aloft at 11.5% compared to 12.3% in August. However, manufacturing IIP tapered from 9.3% to 4.5% while electricity IIP also tapered from 15.3% to 9.9% in September 2023, compared to August. Normally, it is the impact of manufacturing that gets magnified on IIP, since manufacturing has a weight of 77.63% in the overall IIP basket. It must be remembered here that IIP is reported with a lag of one month; which means the September 2023 IIP growth just got reported in the middle of November 2023. Let us first look at the IIP figure on a month-wise basis for the last one year. These are all yoy growth numbers.

IIP growth tapers, but still strong in September 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 tapering in September 2023 to 5.83% from 10.34%.

Month	IIP Growth (%)
Sep-22	3.32%
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	6.03%
Aug-23	10.34%
Sep-23	5.83%

Data Source: MOSPI

Unlike a negative IIP base in August 2022, the base of September 2022 showed positive growth of 3.32%. That was one reason for the lower IIP growth in September compared to August 2023. However, October 2022 was again a month of negative IIP growth, so the base effect should be helpful when the October IIP growth is reported in the middle of December. One indication of the growth momentum is the way previous data gets revised. 

The IIP numbers typically go through two rounds of revisions. A month after the IIP announcement it goes through the first revision and 3 months later it goes through the final revision. The June 2023 IIP has undergone a final upward revision of 29 basis points from 3.76% to 4.05%. At the same time the August 2023 IIP has remained static at 10.34% with no revisions needed. Upward revisions are positive since they give the hope that even the latest September IIP can be revised upwards. But, let us now turn to the break-up of the IIP growth for September 2023 with a 3-month comparison.

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

IIP is normally a basket of products but it is broadly classified into 3 buckets, viz. mining, manufacturing, and electricity. The table below captures the gist of the September 2023 IIP growth and compares with the previous 3 months. Here is the product-wise break-up.

Product Basket	Weights	Jun-23	Jul-23	Aug-23	Sep-23
Manufacture of food products	5.30	-2.9	6.7	4.4	-0.4
Manufacture of beverages	1.04	4.6	4.1	12.6	10.2
Manufacture of tobacco products	0.80	-17.0	0.3	7.4	-4.7
Manufacture of textiles	3.29	0.0	1.1	1.6	3.7
Manufacture of wearing apparel	1.32	-23.5	-22.3	-17.1	-17.9
Manufacture of leather and related products	0.50	7.8	-3.5	3.1	0.0
Manufacture of wood products	0.19	-12.5	-11.5	-2.9	3.4
Manufacture of paper products	0.87	-1.6	-3.2	-0.4	-3.3
Printing and reproduction of recorded media	0.68	-11.0	-8.8	3.4	-3.9
Manufacture of coke and refined petroleum products	11.77	3.2	4.2	10.2	2.6
Manufacture of chemical products	7.87	-2.2	-6.6	-3.9	-5.6
Manufacture of pharmaceuticals	4.98	4.1	12.2	16.8	6.8
Manufacture of rubber and plastics products	2.42	1.3	0.1	4.2	1.5
Manufacture of other non-metallic mineral products	4.09	4.8	6.4	15.3	4.7
Manufacture of basic metals	12.80	16.1	13.7	14.6	12.5
Manufacture of fabricated metal products	2.65	-4.8	2.0	23.2	8.6
Manufacture of computer, electronic and optical products	1.57	-32.5	-16.9	-8.7	-8.9
Manufacture of electrical equipment	3.00	10.7	3.3	17.7	6.3
Manufacture of machinery and equipment	4.77	7.1	6.0	13.0	4.8
Manufacture of motor vehicles, trailers, and semi-trailers	4.86	7.3	8.0	12.0	11.2
Manufacture of other transport equipment	1.78	-0.1	-2.5	8.2	7.1
Manufacture of furniture	0.13	-12.1	-11.1	-23.8	-20.2
Other manufacturing	0.94	-10.6	6.7	-4.6	-13.5
MINING	14.37	7.6	10.7	12.3	11.5
MANUFACTURING	77.63	3.5	5.0	9.3	4.5
ELECTRICITY	7.99	4.2	8.0	15.3	9.9
OVERALL IIP	100.00	4.0	6.0	10.3	5.8

Data Source: MOSPI

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

• The IIP growth of 5.83% in September 2023, compared to 10.34% in August 2023 (revised), was largely influenced by manufacturing. For instance, Mining output for September 2023 grew at 11.5% and electricity at 9.9% compared to 12.3% and 15.3% respectively in August 2023. However, over the previous month, the manufacturing IIP tapered from 9.3% to 4.5%; which is lower than the July figure too. Obviously, with manufacturing having a weight of 77.63% in the IIP basket, that predominance of manufacturing ensured that the impact on IIP got magnified.

   

• In the month of August 2023, the products that saw the highest positive growth were categories like basic metals, motor vehicles, beverages, fabricated metal products and transport equipment. These are largely driven by domestic demand. The products that saw the sharpest fall in growth on a yoy basis include furniture, wearing apparel, computer electronics and chemical products (the same suspects as last month). The pressure is most evident in the export driven sectors, due to weak global demand.

While the base effect did have an impact on the surge in IIP, it cannot be forgotten that this robust growth comes 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. 

Interpreting the annualized IIP data for H1-FY24

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 product-wise basis. The latest fiscal year that FY2023-24 refers to the 5 months cumulative data from April to August 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	3.1
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	-0.9
Manufacture of wearing apparel	1.32	-29.9	27.4	-7.4	-21.9
Manufacture of leather and related products	0.50	-18.0	1.3	-5.8	0.0
Manufacture of wood products	0.19	-19.6	15.1	-0.8	–8.8
Manufacture of paper and paper products	0.87	-23.3	17.7	0.6	-4.4
Printing and reproduction of recorded media	0.68	-28.0	12.4	23.4	-2.8
Manufacture of coke and refined petroleum products	11.77	-12.2	8.9	5.7	3.5
Manufacture of chemicals and chemical products	7.87	-2.1	4.3	6.9	-2.9
Manufacture of pharmaceuticals	4.98	1.6	1.3	-2.4	13.8
Manufacture of rubber and plastics products	2.42	-3.7	8.0	0.5	2.7
Manufacture of other non-metallic mineral products	4.09	-12.9	20.1	6.6	8.0
Manufacture of basic metals	12.80	-5.8	18.6	8.1	13.3
Manufacture of fabricated metal products	2.65	-13.7	10.9	-1.6	5.2
Manufacture of computer, electronic and optical	1.57	-12.6	11.1	-6.4	-15.1
Manufacture of electrical equipment	3.00	-12.3	12.2	-4.2	10.3
Manufacture of machinery and equipment	4.77	-14.1	11.0	10.5	8.0
Manufacture of motor vehicles and trailers	4.86	-19.1	18.4	19.3	9.4
Manufacture of other transport equipment	1.78	-18.0	1.6	11.6	5.6
Manufacture of furniture	0.13	-27.9	23.3	16.4	-18.2
Other manufacturing	0.94	-22.5	49.0	-3.0	-5.0
MINING	14.37	-7.8	12.2	5.8	8.7
MANUFACTURING	77.63	-9.6	11.8	4.7	5.7
ELECTRICITY	7.99	-0.5	7.9	8.9	6.1
OVERALL IIP	100.00	-8.4	11.4	5.2	6.0

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

There are some interesting trends that emerge by looking at a period starting the COVID year and going forward. Remember, this is data for the first half of FY24 annualized, but past experience has been that annualization of four months data or more is fairly reflective, unless there are some major economic disruptions.

• How does FY24 look, compared to FY22 and FY23. Growth in FY22 was on a very low base since FY21 was the year of COVID shutdowns. Hence that is not a comparable figure. However, FY23 saw full year IIP growth normalize to 5.2%, while for the first 6 months of FY24, the cumulative IIP growth stands at 6.0% on an annualized basis. It is still too early to say if the IIP can pick up, but there are some positive indications in the form of revival in capital investment cycle. That is normally a reliable lead indicator.

   

• Let us now turn to the products that are pulling up the IIP and the products that are inflicting pain on IIP growth. Let us look at the positives first. IIP growth (especially the manufacturing IIP) has grown on the back of sectors like pharmaceuticals, basic metals, electrical equipment, plant & machinery as well as motor vehicles. These have been positive triggers for the manufacturing IIP in the first 6 months of FY24. What about the negative triggers. Pressure has come in FY24 from wearing apparel, computer & electronics, furniture, and tobacco products. The common link is that these are export basket products; where weak global demand has been the reason for negative growth.

The good news is that annualized IIP for FY24 is already 80 bps better than FY23. But the more gratifying news is that manufacturing IIP for FY24 is nearly 100 bps above the comparable figure of FY23. This can be attributed to the fructifying of the PLI schemes and the revival of the capital investment cycle. Global headwinds remain the X-factor for IIP.

How is the IIP data likely to influence RBI policy?

In the latest October 2023 monetary policy, the RBI held status quo for the fourth policy in a row. While inflation was a concern in recent months, it has tapered and the October 2023 CPI inflation is expected at below 5%. So, will the IIP data influence the RBI policy stance?

• What we have seen in the last few months is the RBI focusing its 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. As manufacturing IIP shows positive traction, RBI still has the luxury to wait and watch since inflation is rapidly falling. Rate hikes loo unlikely, with Fed also softening its language. 

   

• What works for the RBI is that, domestic growth factors have offset global headwinds and IIP is still robust. RBI has not reasons to spoil the growth party; when inflation is already tapering in India. RBI may use this Goldilocks effect to wait just that bit longer!

RBI may be worried once the surge in growth triggers consumption, credit, and inflation. That looks like a distant possibility at the current juncture. For now, the RBI will use the IIP as more of an observation data point and not a decision making data point.