IIP shocks market as it dips 4.0% in October 2022

13 Dec 2022 , 09:24 AM

However, IIP had bounced back in September. Now, we have 2 negative IIP readings in the last 3 months and that is hardly an elevating feeling.
The only redeeming factor is that the first revision for September IIP growth has been favourable, being upgraded from 3.09% to 3.47%. That does give hope that the October IIP contraction should be less intense eventually. Aggressive rate hikes by RBI, weak global demand, tepid consumer spending and a major dent on exports hit IIP for October 2022.

In October, there is no base effect to blame because the October 2021 base IIP growth at 4.17% was almost similar to 4.35% in September 2021 However, the 3.47% IIP growth in September 2022 has been contrasted by the -4.0% contraction in October 2022. Growth is still positive across mining and electricity, but manufacturing bore the brunt of the slowdown. With weightage of 77.6% in IIP basket, manufacturing has hit IIP growth hard.

Data Source: MOSPI

The domestic economy and the globally economy are delicately poised. The Ukraine war is threatening to create a full blown energy crisis. Fears of slowdown in the US, UK and the EU is making customers and corporates cautious; hitting demand and exports. Also, the rather hawkish stance adopted by the RBI to control inflation is having a deep impact on growth. inflation us down sharply in response to RBI hawkishness but IIP growth will be the worry.

How the IIP sectoral break-up looked like in October 2022

October 2022 marks the seventh month of fiscal year FY23. Let us start with the 3 principal components of IIP in October 2022 viz. mining, manufacturing and electricity. Mining growth for October 2022 was 2.46%, manufacturing contracted by -5.65% while Electricity grew at 1.20%. Overall contraction in IIP for October 2022 at 4.0% gravitated towards manufacturing; which is apparent considering its 77.63% weightage in the IIP basket.

What about the cumulative picture for the first 7 months of FY23 from April 2022 to October 2022? For FY23 till date, mining grew at 4.0%, manufacturing at 5.0% and electricity at 9.4%. The cumulative IIP growth for FY23 till October 2022 stands at 5.3%. Despite the pressure in the last 3 months, FY23 IIP is still in the positive zone with positive momentum.

Product basket that moved IIP in October 2022

IIP contraction of -4.0% for October 2022 reflects a sharp fall after a rather heart-warming recovery in September. Clearly the global headwinds and the consumer scepticism are still too high and are impacting demand. Here is a quick look at specific products that triggered the -4.0% contraction in IIP. Let us first focus on the positive triggers for the IIP in October 2022. Products that triggered the positive surge in IIP for October 2022 include Printing & Media (+14.6%), Motor Vehicles (+12.3%), Furniture (+6.8%), Metal Products (+6.5%), fabricated metals (+4.5%) and beverages (+2.8%).

Now for the IIP depressants. Among the key items that pulled down IIP growth in October 2022 were Apparel (-37.1%), Electrical Equipment (-33.2%), Other Manufacturing (-31.0%), Leather Products (-24.3%), Textiles (-18.6%), tobacco products (-14.3%),  wood products (-12.7%), Computers & Electronics (-12.3%) and paper products (-8.9%). If you look at the mix of the IIP depressants, most of them are export dependent sectors. Clearly, the global uncertainty and central bank hawkishness has hit exports hardest. However, if you look at the first 7 months to October 2022, there are 5 sectors with negative cumulative growth.

How does the IIP look from a use-based perspective for October 2022? In terms of user groups, Primary Goods grew 2.0%, Capital Goods contracted -2.3%, Intermediate goods contracted -2.8% and infrastructure goods grew by 1.0%. However, the pressure came from consumer durables demand contracting by -15.3% and the demand for consumer non-durables contracting sharply by -13.4%. Recession worries raised stagflation expectations and that has hit consumer demand.

Quick look at the high frequency growth for October 2022

We can break up the -4.0% IIP contraction for September 2022 into mining, manufacturing and electricity. But, more importantly, it is the high frequency month-on-month growth that gives a precise picture of short-term momentum in the IIP basket. By month on month, we refer to the sequential performance of October over September data.

Weight	Segment	IIP Index Oct-21	IIP Index Oct-22	IIP Growth Over Oct-21	IIP Growth (HF) Over Sep-22
0.1437	Mining	109.80	112.50	+2.46%	+12.5%
0.7764	Manufacturing	136.40	128.70	-5.65%	-4.53%
0.0799	Electricity	167.30	169.30	+1.20%	-9.66%
1.0000	Overall IIP	135.00	129.60	-4.00%	-3.28%

Data Source: MOSPI

The overall MOM high frequency growth turned negative once again to -3.28% with most of the negative vibes coming from electricity and manufacturing. Mining showed positive high frequency momentum in the month of October 2022. The negative signals in October 2022 emanate from the fact that both the yoy IIP and the MOM IIP have shown considerable worsening and that is a clear impact of the global and domestic headwinds hitting demand.

Time for RBI to do a reality check on policy stance

In its December 2022 policy, the RBI did show some restraint and hiked rates by just 35 bps rather than its normal 50 bps. Clearly, the RBI appears to have taken its cues from the US markets. However, the problems for RBI are more real in the Indian context. India has shown GDP growth of 6.3% in the second quarter giving hopes that full year growth in GDP may eventually gravitate towards the 7% mark. However, that is only possible if the cost of funds come down sharply and export demand also shows signs of green shoots.

The government and the RBI must take cues from two takeaways from the corporate results for the second quarter. Firstly, the pressure of interest costs is quite substantial in the second quarter with the average interest coverage ratio down by 1X on yoy basis. That is a direct impact of higher interest rates translating into higher cost of funds. The seamless transmission of rates to the cost of funds is also hastening the impact. The second is the huge impact that cost inflation at multiple levels is having on profits and output.

It must be said that the RBI has substantially front-loaded the rate hikes by undertaking 3 rounds of 50 bps each, before tapering to a 35 bps hike in December. However, the rate hikes total up to 225 bps since May 2022 and the repo rates are now 110 bps higher than the pre-COVID rates. For an economy that is heavily betting on over 7% GDP growth and outclassing China by 400 bps on the GDP front, high interest rates are beginning to pinch hard. One can argue that much of the pressure on the IIP front is due to global slowdown and weak exports, which are not in the control of the RBI. The best the RBI and the government can do in these conditions is to tone down the impact of what they can control; which is the cost of funds. That is the message from the IIP data.