India’s May IIP signals sound factory activity and a recovering consumer

India’s IIP (Index of Industrial Production) growth rose to a three-month high of 5.2% YoY in May 2023, following a steady performance in mining, manufacturing, and electricity output. 

This was a sharp moderation from 19.7% a year ago but improved compared to 4.5% in April 2023.

However, annual numbers must be interpreted with caution given that the sudden spike in May 2022 was an anomaly driven by the post-covid base effect.

The improvement in electricity output marked the first positive reading in two months, adding to market optimism.

Sectoral breakdown

After moderating in March 2023, the manufacturing sector has continued to show positive momentum, rising from 4.9% YoY in April 2023 to 5.7% in the latest print.

Within the manufacturing sector, the component of basic metals showed a strong performance, growing at an annual rate of 9.6% in May 2023.

Although mining output has eased from its current-year highs of 9% in January 2023, the sector continues to show robust growth, coming in at 6.4% in May 2023, compared to 5.1% in April 2023 and 11.2% in May 2022.

Electricity output edged higher by 0.9% after posting declines in the previous two months.

This is a positive development even though the improvement has moderated sharply from 23.5% YoY in May 2022, which again was largely influenced by the unusual circumstances around the global health crisis.

Use-based classification

Overall, primary goods have broadly moderated during 2023, reaching a high of 9.8% in January 2023, and a low of 1.9% in April 2023.

However, the category witnessed a firm increase to 3.5% YoY in the latest report.

Due to the renewed emphasis on capital expenditures by policymakers and the central government, capital goods and infrastructure shifted higher in May 2023, even though the latter moderated from 15% YoY in the previous month to 14% YoY.

Capital goods rebounded sharply, rising to 8.2% YoY as against 4.6% YoY in the previous month, but still below 9.1% in March 2023.

This category was down from an unnaturally high increase of 53.3% YoY in May 2022.

Consumer goods

The most significant result was from the consumer segment, which is split between durables and non-durables.

Consumer durables shifted 1.1% higher, returning a positive print for the first time in six months.

This was an important boost to industry sentiment and bodes well for future factory production.

The consumer nondurables category continued to experience sound growth as output rose by 7.6%, although this was a moderation from 10.8% in April 2023.

However, this is still significant, since it was the second consecutive month of high growth given that the consumer non-durables sector had suddenly contracted from 12.5% YoY in February 2023 to -2.7% in March 2023.

Having said that, the recent Refinitiv-Ipsos India Primary Consumer Sentiment Index (PCSI) published in late June, weakened by 2.6%.

Final remarks

Mining and manufacturing were the key drivers behind the improvement of the IIP.

The IIP had slipped to 1.7% YoY in March 2023, suggesting that with two consecutive months of growth at 4.5% YoY and 5.2% YoY, any immediate danger of a prolonged industrial slowdown has likely been averted.

However, export demand remains weaker than normal, given the slowdown in global growth and largely aggressive monetary policy throughout several partner countries.

This is being cushioned by initial signs of a turnaround in domestic consumer demand, which in turn shall have positive knock-on effects on future industrial activity.

Further, the decision of the Reserve Bank of India to pause tightening may continue to prove beneficial for capital investments.

Lastly, to support the recovery in industrial production, Government of India officials are working on a host of policy measures to improve financial inclusion, facilitate deeper access to debt markets and allow micro, small and medium enterprises to leverage new and innovative avenues of capital.

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