August 2022 IIP dips into negative as hawkishness hurts

The combination of global hawkishness, rising inflation risks and pressure on exports led to negative IIP growth in the month of August 2022. Of course, one argument can be that the IIP growth in August 2021 was elevated at 12.97% and the base effect should sober later on. However, August saw contraction in manufacturing output and a much deeper contraction in mining output. It was only electricity generation that managed to just about hold in the positive territory. Obviously, manufacturing with its oversized weightage in the IIP, tended to influence the final number.

Data Source: MOSPI

To be fair, there have been several headwinds that have plagued overall growth. To begin with, the Russia-Ukraine war shows no signs of relenting and that is contributing largely to the energy crisis globally. The obsession of China with zero-COVID status is hitting supply chains hard. On top of that, persistent tightening by central banks has failed to curb inflation in any significant manner. Even in the case of India, RBI has been extremely hawkish, but inflation has risen sharply even in the month of September 2022.

A quick look at recent revisions to the IIP. The IIP for June 2022 got revised up by 40 bps to 12.70% while the IIP for May 2022 was revised up 8 bps to 19.72%. Earlier, the IIP for April 2022 had been revised lower by 8 bps to 6.66%. Overall, there is not much of a concern on the revisions, except the overarching impact of the global headwinds, starting to manifest.

How does the sectoral break-up of IIP look in August 2022?

August 2022 marks the fifth month of the current fiscal year FY23 and we now have data for 5 good months. Let us start with the 3 principal components of IIP viz. mining, manufacturing and electricity for August 2022. Mining sector growth for August 2022 contracted by -3.86%, manufacturing contracted by -0.68% but Electricity grew at the rate of 1.38%; tepid but positive nevertheless. Overall contraction in IIP for August 2022 at -0.83% gravitated towards manufacturing growth, which is not surprising considering its 77.63% weightage in the IIP basket.

Let us also look at the cumulative picture for the first 5 months of FY23 from April 2022 to August 2022. For FY23 till date, mining grew at 4.2%, manufacturing at 7.9% and electricity at 10.6%. The cumulative IIP growth for FY23 till date stands at 7.7%, despite a rapidly growing base of last year. However, the momentum of IIP has surely been weakening.

Which products drove the IIP growth in August 2022

IIP contraction of -0.83% for August 2022 is surely a disappointment after 17 months of positive IIP growth. it is indicative of the larger challenges of global headwinds that are having an impact on the IIP figure. Here is a quick look at specific products that triggered the -0.83% growth in the IIP. Let us first focus on the positive triggers for the IIP in August 2022. The handful of products that triggered the positive surge in IIP for August include Furniture Manufacture (+44.4%), Recorded Media (+27.6%), Motor Vehicles & Trailers (+23.7%), Beverages (+7.2%) and Coke & Refined Petroleum (+6.6%).

Among the key items that depressed IIP growth in August 2022 were Electrical Equipment (-28.2%), Pharmaceuticals (-19.0%), Wearing Apparel (-18.3%), leather products (-15.3%), tobacco products (-13%) and textiles (-12.2%). If you look at the mix of the depressants of GDP, most of them are export dependent sectors. Clearly, the global slowdown and recession fears are playing on global demand, which is evident form the numbers. However, if you look at the first 5 months to August 2022, then only pharma and textiles have shown negative growth; once again a hint of pressure on the export front.

How does the IIP look from a use-based perspective for the month of August 2022? In terms of user groups, Primary Goods grew 1.7%, Capital Goods grew 5.5%, Intermediate goods grew 0.6% and infrastructure goods grew by 1.7%. However, the pressure came from consumer durables demand contracting by -2.5% and the demand for consumer non-durables contracting by a whopping -9.9%. The message is that the spate of hawkishness has surely hit consumer demand and that is showing in the IIP numbers.
 
You must look at the high frequency IIP story for August 2022

We can break up the -0.83% IIP contraction for August 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that gives the most precise picture of short term momentum in the IIP basket. By month on month, we refer to the index of August data over July data. This captures the short term shifts and trends much better.

Data Source: MOSPI

Let us now turn to the high frequency MOM growth. The overall MOM high frequency contraction has been -2.31%. in fact, the yoy IIP came negative after a gap of 17 months so it is after a very long time that the yoy IIP number and the high frequency IIP number have come in the negative. There is clearly pressure coming from the exports front and that is what the manufacturing pressure shows. The curbs on mining exports put by India has also resulted in lower growth of output by the mining companies. If you look at the break up of the IIP product wise, the maximum pressure is coming from the export driven sectors. It is a clear indication that the pressure is predominantly coming from the global slowdown in demand as companies get more wary of the recession blues.

Is it time for RBI to look at IIP rather than inflation?

That is the million dollar question. Since March 2022, the RBI has almost been obsessed with cutting down inflation and towards that end it has already hiked rates by 190 basis points. In the forthcoming December policy also the RBI is likely to raise rates and the terminal rate target has been increased by 50 to 70 basis points, although there is no final confirmation by the RBI. Inflation did show signs of responding, but has bounced back to 7.41% in the month of September; a spike of 71 bps in just 2 months. Remember, the growth engine is the big advantage that India has and the RBI cannot afford to have that spluttering.

Going ahead, we reiterate that the IIP number could start mattering a lot more and the RBI would be wary of any sharp fall in high frequency IIP. For the first time in 17 months, yoy IIP has turned negative. The RBI has been aggressive and front-loaded rate hikes so that in future it can adopt course correction. From the December 2022 policy, the IIP could once again start to matter to the RBI policy stance. It may be the right choice too!