Industrial output jumps to 7.1% for April 2022

Late on Friday, the Ministry of Statistics and Policy Implementation (MOSPI) announced the Index of Industrial Production (IIP) growth for the month of April 2022. Normally IIP is announced with a lag of one month. IIP growth for April 2022 came in sharply higher at 7.14%, with all round growth in the 3 segments viz. mining, manufacturing and electricity.

This is a welcome break. For nearly 5 months, the IIP has hovered around the 2% mark with an average growth of around 1.5%. This is sharply higher for April at 7.14%. However, on a 3 year period compared to pre-COVID levels, the IIP growth would still be fairly tepid. The question is whether this can be sustained, considering the macro headwinds.

Mining, manufacturing and electricity; how it panned out

The mining sector growth for April 2022 was an impressive 7.81% while Electricity grew at 11.78%. The power sector has clearly benefited from record power demand, support from alternate sources of power as well as adequate supply of domestic and imported coal for thermal plants. The big takeaway was the 6.34% YoY growth in manufacturing, which is determining factor in IIP considering its 77.63% weightage in the IIP basket.

Apart from the absolute IIP numbers, it must be noted that all IIP numbers go through 2 revisions. There is the first revised estimate after 1 month and final revised estimate after 3 months. For January 2022, finally revised estimate was upgraded from 1.46% to 1.98%. the first revised estimate for March 2022 was also upgraded from 1.85% to 2.20%. 

But, there is still concern on the high frequency growth

IIP growth is normally YoY growth. To get a picture of short term momentum, one must also look at IIP on a MOM basis. The table captures the gist
 

_{Data Source: MOSPI}

You just need to focus on the last 2 columns. The second last column shows the break-up of the yoy IIP growth for April 2022 at 7.14%. It has also been broken up into mining, manufacturing and electricity for a more granular picture.

However, this number has 2 flaws. Firstly, it is too dependent on the base effect and a base that is too high or too low can distort this number. Secondly, it does not capture short term growth momentum.

The other options is to look at high frequency growth in the last column which is the month on month growth. The MOM growth picture shows mining (-19.67%), manufacturing (-8.81%) with only electricity growing positively at (+1.83%).

Overall MOM IIP -9.21% contraction is in stark contrast to the positive MOM growth in March 2022. Short term headwinds like inflation, currency and supply chain bottlenecks played spoilsport.

What will be the impact of IIP on RBI policy?

Here is how the latest IIP number is going to impact the RBI stance on monetary policy going ahead.

1. In the last few months, RBI has already shifted its focus from boosting growth to controlling inflation. That is evident in the 2 rounds of rate hikes.

2. The latest IIP shows that growth is not the main issue now. The RBI has done its best and it is time to shift focus to inflation control. That will be the theme going ahead.

3. RBI stance is that although growth may be industrially salutary, inflation is unjust, especially for the vulnerable segments. Markets have to stop looking at RBI and at monetary policy for any growth impetus now.

4. In addition, most of the global central banks like US Fed, Bank of England, Reserve Bank of Australia and RBI have given primacy to inflation control. That is likely to stay.

5. Recently, World Bank downsized global growth to 2.9% and India growth for FY23 to 7.5%. That may still be a little optimistic, since the RBI pegs it even lower.

6. For now, fiscal policy will focus on making IIP growth immune to the external headwinds. That is the best that can be done at a policy level. It looks like the days of government accommodation to boosting industrial growth are unlikely to return any time soon.