IGI Logo

Modest recovery

October IIP expanded 3.2% YoY (3.8% on 2Y CAGR basis), marginally better than September’s 3.1% YoY (2% on 2Y CAGR). Takeaways: i) Manufacturing remains weak despite a sharp fall in base period two years ago and healthy exports momentum, perhaps reflecting weaker pent-up demand in the goods sector. ii) Capital goods and consumer goods are weak, although non-durables and infrastructure are doing relatively well. iii) Labour-intensive industries are moving in line with other segments, unlike post-first wave when they lagged.

Going ahead, fading global reflation and ASEAN bouncing back may weigh on exports demand, hurting industrial activity. Lower-end consumption may perk up though.

Manufacturing on a weak footing, despite a very low base

IIP for October was broadly in line with expectations at 3.2% YoY (September: 3.1% YoY). However, given a disrupted base, we prefer to analyse it on a 2Y CAGR basis. On that basis, IIP grew 3.8% YoY (versus 2% in Sep-21). The rise is largely explained by a very low base two years ago. In fact, October and Apr-Oct FY22 IIP growth is flat on a 3Y CAGR basis. Among components, manufacturing remains the weakest at 3.3% (2Y CAGR), despite relatively healthy momentum in manufactured exports and low base. Muted growth reflects weak pent-up in goods in the second unlocking versus the first. Supply disruptions could also be weighing on production.

Consumer goods, capital goods remain weak links

With regards to drivers, cyclical parts of economy - IIP capital goods and consumer durables – remain weakest, contracting on a YoY basis and are 10–20% lower than output three years ago. That said, infrastructure goods has done relatively better, reflecting the government’s focus on infrastructure spending. Meanwhile, exportoriented segments such as chemicals have also done better than others on a relative basis. Pharmaceuticals, however, was quite weak. Notably, the trends in labourintensive and capital-intensive components are relatively uniform, unlike the first unlocking when labour-intensive industries lagged quite a bit.

Goods pent-up weaker this time; global demand key variable

The momentum in industrial activity seems to be weak despite healthy exports momentum, even on real basis. This essentially reflects low pent-up demand in the goods economy this time versus the first wave. In addition, supply bottlenecks perhaps too could be weighing on industrial activity. The high frequency data for November suggests that relatively weak goods demand. In fact, auto sales have been disappointing.

Over coming months, we think exports, which have been robust so far, could see moderation as global reflation fades and ASEAN bounces back. However, fuel tax cuts and fading covid shock for MSMEs could support lower-end consumption. Nonetheless, it’s critical that government keeps up the spending on capex/infrastructure to support domestic activity. Else, IIP could remain weak.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer