IIP growth shows traction despite high base

When it comes to industrial growth, it looks like the ghost of the pandemic driven slowdown may have been finally exorcised. May 2022 (IIP is put out with a one-month lag) IIP at 19.6% was the highest in the last one year and also marked the 15th consecutive month of positive IIP growth. This IIP growth of 19.64% for May 2022 comes on top of a robust growth of 27.61% in May 2021. Of course, if you consider the sharp correction in IIP in the month of May 2020, then, the IIP would still be around pre-COVID levels, but momentum is positive.

How the 3 IIP components fared?

The 3 key IIP drivers viz. mining, manufacturing and electricity recorded positive growth for May 2022. On a yoy basis, Mining grew at 10.90%, manufacturing at 20.63% and Electricity at an imposing 23.47% in May 2022. Manufacturing growth at 20.63% was specifically significant due to its weightage of 77.63% in the IIP basket. Even on a cumulative basis, i.e. April and May of FY23 combined, mining grew 9.4%, manufacturing 12.8% and electricity 17.4%. For FY23 till date, the IIP growth stands at 12.9%, which is a solid start to FY23.

Let us briefly look at the IIP revisions and why they matter. Typically, the IIP goes through two revisions. There is the first revised estimate after 1 month and the final revised estimate after 3 months. Along the May IIP, the MOSPI also announced the first revised IIP estimate for April 2022, which was lowered by 40 bps from 7.14% to 6.74%. At the same time, it also announced the final revised estimate for February 2022, which fell 31 bps from 1.46% to 1.11%. Revised estimates are seeing some impact of domestic and global headwinds.

Why the focus should be on high frequency IIP numbers?

On way to look at the IIP numbers is via the traditional yoy growth. However, that tends to be too much of base influenced. Another option is to look as the month on month IIP growth, which is also the high frequency growth. This captures, the short term momentum a lot better, especially when we operate in a volatile macro environment.

Data Source: MOSPI

What does the high frequency IIP growth on a MOM basis tell us? In April 2022, the high frequency IIP was under a lot of pressure. On the other hand, the high frequency IIP growth in May 2022 is decisively positive across mining, manufacturing and electricity. The MOM growth for mining was +3.36%, manufacturing was +2.05% and electricity was at +2.78%. The overall headline MOM IIP growth was at 2.30%, which shows a lot of positive momentum in IIP. This performance is despite the global and domestic headwinds.

Will RBI monetary stance factor in the higher IIP growth?

Not necessarily. Since April 2022, RBI has shifted its focus very clearly to reining in inflation above all other monetary goals. However, inflation continues to stay above 7% and so that will continue to be the primary focus for the RBI. Had IIP growth faltered or dipped into negative, the RBI may have had second throughs on its monetary strategy. However, with IIP growth at a healthy 19.6%, growth is the last thing on the mind of the Monetary Policy Committee of the RBI. RBI would be concerned about inflation 300 bps above the target.

The indications from the strong IIP number is that the Indian economy has the resilience to handle a more hawkish monetary policy. This can happen even without compromising on industrial growth. Globally, and in India, there could be an increasingly bitter battle between curbing inflation and avoiding an all-out recession. The US yield curve is already inverted and that could make the Fed more cautious. It does look like August policy may see another rate hike and the IIP number would only underline the stance of the RBI; control inflation.