July 2024 IIP bounces to 4.84% as manufacturing recovers

13 Sep 2024 , 01:02 PM

JUL-24 IIP BOUNCES DESPITE HIGHER BASE

The month of July 2024 saw the index of industrial production (IIP) gather momentum, led by the heavyweight manufacturing basket. At 4.84%, the month of July 2024 marked a sharp improvement in manufacturing IIP even as electricity IIP tapered and mining IIP was sharply lower. IIP growth in July 2024 at 4.84% was higher than the June figure of 4.73% (revised up from 4.24%). To an extent, the supply chain constraints imposed by the Middle East crisis and the fears of weak demand in the US and China led to rather modest IIP growth in June and July 2024. If June output got hit by election uncertainty, July was modest due to low capex spending by the government and the budget uncertainty. But the actual growth may be higher if you consider the base effect. For instance; between June 2023 and July 2023 the base IIP had actually risen from 4.05% to 6.18%. The fact that the growth is still positive despite a 213 bps higher base shows that the undertone of growth is fairly strong.

Remember, IIP is always reported with a lag of one-month. So, the IIP for June is reported in mid-August and the IIP for July just got reported in mid-September. The month saw an improvement in the manufacturing output. However, electricity output was lower while the mining output crashed on policy uncertainty. Manufacturing has a weightage of 77.63% in the IIP basket, and has an oversized impact on the overall IIP. Normally, the IIP numbers go through two revisions i.e., after 1 months and after 3 months; and this time both were smart upgrades. The IIP growth of June 2024 saw the first upgrade of 49 bps from 4.24% to 4.73%. At the same time, the April 2024 IIP saw final upgrade of 21 bps from 4.98% to 5.19%. These upgrades bode well for July 2024 IIP data, for subsequent revisions.

HIGH FREQUENCY IIP GROWTH STAYS NEGATIVE IN JULY 2024

The IIP reading is yoy growth; which is with reference to the comparable month in the previous year. One shortcoming of the yoy IIP growth is that it only captures the secular trend but ignores high-frequency short term momentum and is too vulnerable to the base effect. In India, it is equally important to understand this high frequency momentum in IIP. The MOM growth in IIP, therefore, captures these short term eccentricities in the data much better. How does the high frequency MOM growth look like for the month of July 2024? Obviously, here we will be looking the components of IIP index with reference to their June 2024 numbers. Here is a quick dekko.

For July 2024, the high frequency growth across mining and electricity was in the negative, while manufacturing was in the positive. Despite the heavy weightage assigned to manufacturing, the overall IIP growth was negative in MOM terms. That shows a good deal of pressure in the short term; especially on mining. For July 2024, the high frequency mining IIP was -14.01% lower, the manufacturing IIP was +1.64% higher and electricity IIP -1.17% lower. As a result, the overall MOM IIP was also down by -0.73%. The MOM IIP numbers indicate that, irrespective of longer-term growth numbers, short term pressure is there.

HOW THE IIP TROIKA PERFORMED IN JULY 2024

In the last 3 months, the IIP Troika (mining, manufacturing, and electricity) was oscillating. In February 2024, all 3 showed sharply better levels compared to the previous month. However, in March 2024, Manufacturing and Electricity were robust, while mining output fell sharply. In May, it was manufacturing that faltered. In June 2024, manufacturing and electricity showed lower growth while mining IIP was the saving grace. In July 2024 all the 3 components were in the positive, although electricity was the fastest growing space.

Let us start with mining IIP for July 2024 on yoy basis. The July 2024 mining IIP growth was modest at 3.7%, sharply lower than 10.3% in June 2024. If you look at electricity IIP, it stood at 7.9% in July 2024, lower than 8.6% in June 2024. However, manufacturing bucked the trend in July 2024 and grew at the rate of just 4.6%, compared to 3.2% in the month of June 2024. As a result, the overall IIP for July 2024 at 4.84% was marginally higher than the revised June IIP growth of 4.73%. Manufacturing proved to be the saving grace.

HOW IIP GROWTH EVOLVED OVER LAST 1 YEAR

The broad trends from the IIP are modest but attractive in July 2024. Despite the base IIP number between June 2023 and July 2023 shifting higher from 4.05% to 6.18%; the yoy IIP growth in July is 11 bps higher at 4.84%. The election related slowdown in the previous month appears to be tapering out.

Month	IIP Growth (%)
Jun-23	4.05%
Jul-23	6.18%
Aug-23	10.87%
Sep-23	6.35%
Oct-23	11.89%
Nov-23	2.47%
Dec-23	4.39%
Jan-24	4.21%
Feb-24	5.60%
Mar-24	5.47%
Apr-24	5.19%
May-24	6.18%
Jun-24	4.73%
Jul-24	4.84%

Data Source: MOSPI

There are 2 positive takeaways from the latest IIP data. Remember, the IIP has been higher, despite a higher base effect, which magnifies the IIP story. Firstly, the Red Sea crisis and disruption of trade, is having a diminishing impact on IIP. India is not only seeing a revival in the traditional export baskets, but also in the new emerging order with India exporting defence, chemicals, and electronic goods in a big way. Also, the much feared hard landing globally is not really happening; with GDP in the US still robust. The other positive takeaway is that rural demand is coming back; which was highlighted by rating agencies and was also evident in the Q1FY25 results. Rural growth could be the answer to the next growth thrust.

JULY 2024 IIP: MANUFACTURING REBOUNDS, MINING STRESSED

The table captures comparative IIP growth for last 4 months, with respective component weights. Overall numbers for mining, manufacturing, and electricity are segregated.

Product Basket	Weights	Apr-24	May-24	Jun-24	Jul-24
Manufacture of food products	5.3025	-13.1	-5.3	2.5	-1.8
Manufacture of beverages	1.0354	13.4	8.2	0.2	2.3
Manufacture of tobacco products	0.7985	-8.9	4.9	-10.9	13.1
Manufacture of textiles	3.2913	-0.3	-0.5	-1.5	0.0
Manufacture of wearing apparel	1.3225	14.1	9.8	2.1	7.3
Manufacture of leather and related products	0.5021	-8.6	1.3	-3.9	6.9
Manufacture of wood products	0.1930	-5.7	1.6	6.0	1.9
Manufacture of paper products	0.8724	-5.3	4.1	-1.7	-1.7
Printing and reproduction of recorded media	0.6798	-7.3	3.6	-3.7	-3.6
Manufacture of coke and refined petroleum products	11.7749	4.9	2.0	-0.8	6.9
Manufacture of chemical products	7.8730	0.3	0.7	1.0	4.7
Manufacture of pharmaceuticals	4.9810	3.1	7.3	-2.9	-8.1
Manufacture of rubber and plastics products	2.4222	2.4	-1.2	7.6	8.8
Manufacture of other non-metallic mineral products	4.0853	1.4	0.5	3.1	1.9
Manufacture of basic metals	12.8043	9.3	8.3	6.7	6.4
Manufacture of fabricated metal products	2.6549	11.3	12.3	3.6	11.0
Manufacture of computer, electronic and optical	1.5704	2.4	20.1	10.5	10.5
Manufacture of electrical equipment	2.9983	3.6	15.2	31.8	28.3
Manufacture of machinery and equipment	4.7653	0.3	2.1	1.8	6.3
Manufacture of motor vehicles, trailers	4.8573	12.0	6.6	4.2	3.2
Manufacture of other transport equipment	1.7763	17.4	16.8	9.1	25.5
Manufacture of furniture	0.1311	52.6	33.9	16.2	7.9
Other manufacturing	0.9415	9.9	-8.6	-12.5	-14.4
MINING	14.3725	6.8	6.6	10.3	3.7
MANUFACTURING	77.6332	4.2	5.0	3.2	4.6
ELECTRICITY	7.9943	10.2	13.7	8.6	7.9
OVERALL IIP	100.0000	5.2	6.2	4.7	4.8

Data Source: MOSPI

The last column shows the most current IIP reading for July 2024. IIP numbers are reported with a lag of 1 month. Here are the key takeaways.

• The IIP growth of 4.84% in July 2024, is higher than 4.73% (revised) for June 2024. What is gratifying is that the July IIP number is on a base that is higher by 213 bps, so the impact of IIP actually should be magnified. Manufacturing growth in the IIP basket is sharply up about 140 bps at 4.6% and that has immensely contributed to the IIP rebound in July 2024. That is not surprising considering that manufacturing has 77.6% weightage.
• In the month of June 2024, the products that saw the highest positive growth were electrical equipment, other transport equipment, tobacco products, fabricated metal products, computers / electronics, rubber & plastic products, wearing apparel, and leather products. Most of these sectors are export dependent and is, therefore, an indication that the worst phase of exports slowdown of the previous 18 months may be coming to an end. The reasons are not far to seek. Export of electronics and electrical equipment has got a big boost from the PLI scheme. But what is more gratifying is the rebound in the traditional export leadership segments of apparel and leather; which had been worst impacted by the trade constraints and global slowdown worries in the last 2 years. It looks like the worst may be over.

In July 2024, manufacturing displayed a sharp rebound of 140 bps, but the real problem was in the mining space which fell sequentially from 10.3% to 3.7% in July 2024. Even electricity was lower compare to last month, with peak summer demand coming to an end. Mining was hit hard by the period of indecision around the government formation and the Union Budget presentation. Going ahead, manufacturing will continue to be the swing factor.

A QUICK LOOK AT THE ANNUALIZED IIP DATA

The latest fiscal year FY25 just has 4 months of data for April, May, June, and July; so that is a good enough time frame to be able to meaningfully extrapolate and derive full year trends. The cumulative IIP growth for FY25 at 5.2% (4 months), was flat over last month, but lower than 6.0% in FY24 and near to 5.5% in FY23 at 5.5%. The fiscal year FY22 may not be comparable due to the low base of the previous year. FY25 picture should evolve clearly in the coming months.

Product Basket	Weights	2021-22	2022-23	2023-24	2024-25
Manufacture of food products	5.3025	5.9	3.8	1.7	-4.8
Manufacture of beverages	1.0354	11.5	23.9	5.7	5.9
Manufacture of tobacco products	0.7985	8.7	1.4	-7.5	-0.9
Manufacture of textiles	3.2913	29.3	-8.4	0.2	-0.6
Manufacture of wearing apparel	1.3225	27.4	0.2	-13.8	7.9
Manufacture of leather and related products	0.5021	1.3	-3.9	-0.6	-1.1
Manufacture of wood products	0.1930	15.1	1.1	-5.6	1.1
Manufacture of paper and paper products	0.8724	17.7	0.8	-3.5	-1.2
Printing and reproduction of recorded media	0.6798	12.4	24.5	-1.0	-2.8
Manufacture of coke and refined petroleum	11.7749	8.9	6.1	4.0	3.2
Manufacture of chemicals and chemical products	7.8730	4.3	7.1	-1.6	1.7
Manufacture of pharmaceuticals	4.9810	1.3	-2.0	9.0	-0.3
Manufacture of rubber and plastics products	2.4222	8.0	0.7	4.5	4.3
Manufacture of other non-metallic mineral products	4.0853	20.1	7.2	6.7	1.7
Manufacture of basic metals	12.8043	18.6	8.1	11.7	7.6
Manufacture of fabricated metal products	2.6549	10.9	-0.5	8.4	9.5
Manufacture of computer, electronic and optical	1.5704	11.1	-2.8	-10.5	10.9
Manufacture of electrical equipment	2.9983	12.2	0.9	7.8	19.6
Manufacture of machinery and equipment	4.7653	11.0	11.3	6.8	2.7
Manufacture of motor vehicles and trailers	4.8573	18.4	22.1	11.6	6.4
Manufacture of other transport equipment	1.7763	1.6	17.5	14.5	16.9
Manufacture of furniture	0.1311	23.3	21.0	-5.9	26.0
Other manufacturing	0.9415	49.0	-0.7	-5.5	-6.5
MINING	14.3725	12.2	5.7	7.9	6.9
MANUFACTURING	77.6332	11.8	5.0	5.5	4.2
ELECTRICITY	7.9943	7.9	9.2	7.2	10.1
OVERALL IIP	100.0000	11.4	5.5	6.0	5.2

Data Source: MOSPI (FY25 is 4-Months data)

The last column refers to cumulative data for FY25; but then it is for just 4 months which is normally a fair representation of the full year. The real story of FY25 is not in the overall number but in the components of the IIP basket. For example, if you look at the FY25 IIP numbers, some of the items have shown a sharp turnaround. Furniture has turned around from -5.9% to +26.0%, while electronics has turned around (thanks to Apple) from -10.5% to +10.9%. Weaving apparel and wood products (both export items) have also shown a turnaround from negative IIP to positive IIP in FY25. However, there are also some product items that saw IIP deterioration in FY25; including food products and pharma products. IIP growth at for FY25 at 5.2% appears to be slightly under pressure; but we must remember that it is on a substantial higher base. The cumulative IIP in FY25 appears to be well poised to get upgraded closer to 6.0% in the remaining months of the fiscal year.

WILL IIP DATA INFLUENCE RBI TO CUT RATES IN OCTOBER?

While IIP is not a critical data point for the RBI in deciding inflation, growth remains a key selling point for the Indian economy. It is already the fastest growing economy in the last 3 years and could repeat the feat in the fourth year also. The RBI, obviously, would not want higher interest and higher cost of funds to play spoilsport. For the benefit of RBI, the CPI inflation has remained under the RBI’s long term target of 4% for 2 months in a row. Also, Fed is likely to take up 25 bps rate cut in September and even got to 50 bps, if needed.

In that case, the RBI really cannot afford monetary divergence and would also look at cutting the rates. There is already a strong case for RBI to cut rates with the repo rates static since February 2023. The current repo rates are still a good 135 bps above the pre-pandemic rates and the real rates are at unsustainable levels of over 2%. For all practical purposes, the IIP being stuck in a narrow range, may be the trigger for the first rate cut in October 2024.