7 mins read . 16 Jan 2023
The index of industrial output (IIP) for November 2022 turned around sharply from -4.22% in October 2022 to +7.11% in November 2022. Remember, October was the second time in the last 4 months that the IIP was negative. In fact, August 2022 had seen negative IIP after a gap of 17 months and it was an outcome of supply chain constraints and the pressure on exports. To an extent, the sharp turnaround in the IIP in November 2022 can be attributed to a favourable base effect. For the month of October 2022, the first revision to IIP was 22 basis points lower at 4.22%. Base IIP fell from 4.17% in Oct-21 to 1.02% in Nov-21. So, there was certainly a lot of base effect too in the numbers. Here is the IIP over last one year.
|Month||IIP growth (%)|
To an extent, the sharp bounce in the IIP data from -4.22% to +7.11% can be attributed to the base effect. But, that is only one of the factors. The month of November also saw a reduction in the overall pessimism in the markets. The previous quarter had seen a major impact in IIP due to global headwinds. Central bank hawkishness combined with rampant inflation, weak demand and supply chain constraints was putting pressure on the IIP numbers. That has seen a turnaround. Despite headwinds still being there, Indian industry is investing more into production via expansion plans. Also, there is a lot of inventory accumulation in anticipation of a turnaround in sales. These factors have helped IIP. However, oil prices could be the big X-factor for IIP over the next one month.
|Weight||Segment||IIP Index Nov-21||IIP Index Nov-22||IIP Growth Over Nov-21||IIP Growth (HF) Over Oct-22|
The presentation of IIP is normally broken up into the 3 key components of mining, manufacturing and electricity. Let us first look at IIP on a monthly basis. Mining growth for November 2022 was 9.75%, manufacturing grew 6.05% and Electricity grew at 12.71%. This helped the sharp turnaround in IIP in the month of November 2022 (IIP has 1-month lag). Now, for the cumulative numbers for 8 months of FY23. For FY23 Apr-Nov period, mining grew 4.7%, manufacturing 5.0% and electricity grew 9.8%. This resulted in cumulative IIP growth at 5.5% for FY23 to date. IIP normally tends to gravitate towards manufacturing; considering its rather hefty weightage of 77.63% in the IIP basket.
One important aspect of IIP growth is the High Frequency (MOM) IIP growth, which has been captured in the last column in the table above. This figure gives a much clearer picture of short-term momentum in the IIP basket. What is it that makes the IIP data for November 2022 unique is that along with a sharp bounce in the yoy growth, there is also a sharp bounce in the MOM growth. Normally, when these two IIPs coincide it is a more credible indicator since it captures the secular trend and also the short term momentum in factory output growth. In a sense, the IIP break up of November is almost the reverse of October and shows a lot of industrial optimism in the Indian economy.
One thing the RBI would take solace from is the fact that the India growth story has remained largely unaffected by the global headwinds. India also promises to be the fastest growing large economy in the next two years. However, to sustain that there are two contradictory requirements viz. low interest rates and low inflation. Often, both these are in conflict with each other. With the first advance estimates hinting at GDP of 7.0% for FY23, RBI must hike rates to curb inflation, but sustain growth with low cost of funds. Till data, the RBI has front-loaded rate hikes by 225 bps since May 2022. Government and the RBI will now have to focus on what they can control; which is making easy credit available.