IIP growth tapers to 2.4% in July, as base effect sets in

The good news is that industrial growth is still happening. The bad news is that it is not happening as fast as is expected. In fact, for the month of July 2022, the growth in the index of industrial production (IIP) hit a 4-month low of 2.4%. IIP is typically reported with a one-month lag i.e. July IIP gets reported in September. The 2.4% IIP growth in July 2022 is also sharply lower compared to 12.7% in June 2022. This fall in growth is nothing to worry about but can be attributed to a normalization of the base effect on the yoy IIP growth.

However, there have also been other factors hitting the IIP in July. The export demand has slowed as global economies like the US, UK and Europe face the risk of recession. In addition, the stringent anti-COVID measures in China and the disruption of trade routes due to the Russia-Ukraine war have also resulted in supply chains getting impacted. That has also hit IIP in July. Above all, the heavy monsoon downpour in select regions hit output. All these factors jointly conspired to pull down the IIP in July 2022, apart from the base effect.

The yoy growth in IIP has two problems. Firstly, it is too vulnerable to the base effect and secondly, it is not seasonally adjusted. The alternative is to look at IIP on a sequential month-on-month basis. If you consider on a seasonally-adjusted basis, industrial output or IIP contracted by -0.75% sequentially in July 2022. That is where a rather paradoxical situation comes about. The manufacturing PMI at 56.4 is hinting at expansion in output while the high frequency IIP data is hinting at contraction in industrial growth. 

What started as a risk factor has now become a full-fledged growth concern for the Indian economy. The impact of a slowdown in global growth is starting to be felt by domestic manufacturing companies. Key export sectors like textiles, petroleum products, machinery and equipment saw sequential fall in the IIP in July. In most of these cases, apart from the supply chain constraints, even the monetary tightening has been a factor. Economists worry that if monetary policy stays aggressive, this could just about get worse from here.

One suggestive way is to look at IIP from the perspective of end usage. The key takeaway is that growth in consumer durables plunged to 2.4% in July from 25.1% in the month of June. Consumer non-durables output shrank by -2% in July compared to a 3% in the month of June 2022. Capital goods output growth has done the best in the current month at 5.8% but even that is sharply down from the levels of 29.1% in the month of June 2022. One perspective is that discretionary consumption shifted more to contact-intensive services.

There was slowdown across the board, Manufacturing growth slowed to 3.2% in July from 13% in June while electricity output grew just 2.4%, against 12.7% in June. Mining output shrank -3.3% in July; the first such contraction in 16 months, largely on account of heavy rains in specific mineral rich areas. However, August 2022 could be a better month for IIP growth, going by the estimates put out by ICRA. IIP is expected to grow in the range of 4% to 6% in the month of August, surely an improvement over the lows seen in July 2022.