IIP bounces back to positive on favourable base effect

India’s factory output, as measured by the IIP or the Index of Industrial Production for the month of November 2022 bounced back to a positive 7.1% on an annualized basis after it had contracted by -4% in October 2022. This is the highest level of IIP in the last five months. The Index of Industrial Production (IIP) is reported with a lag of one month. That means; in January, the November IIP gets reported while the inflation is reported on a next month basis. For the April-November 2022 period, which is a cumulative measure for 8 months of FY23, the IIP 5.5% on a yoy basis compared to the previous year. Let us now turn to the growth in each of the 3 segments of IIP.

The Index of Industrial Production (IIP) is normally reported for 3 separate sub-segments. This includes the Mining sector, Manufacturing sector and the Electricity sector. For the month of November 2022, the manufacturing sector, which has the highest weightage in the IIP basket of around 77%, rose by 6.1%. The electricity / power output, which includes generation and transmission, grew by 12.7% in the month of November on a yoy basis. Even mining, despite the headwinds, continued to grow at a healthy clip of 9.7%. The consensus estimate for IIP growth was just 3.2% for November so the actual number is more than double the consensus estimate and to that extent it has been a positive surprise.

One of the classic lead indicators for the IIP is the core sector. Now the eight core sector industries comprising of oil extraction, natural gas, oil refining, coal production, steel, cement, fertilizers and electricity generation has a 40.27% weightage in the IIP. For the month of November 2022 (reported on the last working day of December), the core sector growth had been robust at 5% on a yoy basis. Among the big gainers in output this month, electricity grew by 12.1%, coal output by 12.3%, cement by 28.6% and electricity by 12.1. The core sector numbers show a lot of enthusiasm as companies build up inventories ahead of an expected revival in the Indian economy.

When the bounce in the IIP is read in tandem with the data on lower inflation, it does leave the RBI with some breathing space. After all, RBI cannot take decisions in a hurry and must be fully data driven. If we combine the IIP cues and the inflation cues, one can infer that it has given RBI the power to take a break in February and eventually get back to hiking rates. Most analysts are now almost of the view that the RBI may give a respite in February but would resume in April with upsides of 2 rate hikes of 25 basis points each.