Favourable base helps October industrial growth surge to 16-month high of 11.7%

The Index of Industrial Production, or IIP, is a key indicator of India’s monthly activity levels.

India's industrial output grew by 11.7 percent in October, according to data released by the Ministry of Statistics and Programme Implementation on December 12, as a favourable base effect propelled manufacturing output 10.4 percent higher.

Manufacturing, which accounts for more than three-fourths of the IIP, heavily influences the industrial growth data.

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At 11.7 percent, the latest industrial growth figure as per the Index of Industrial Production (IIP) is the highest in 16 months.

IIP growth had come in at a three-month low of 5.8 percent in September. This number now stands revised at 6.2 percent. In October 2022, India's industrial output had contracted by 4.1 percent.
For the seven months of 2023-24, India's industrial output is up 6.9 percent year-on-year as against 5.3 percent in April-October 2023.

In October, industrial growth was pushed up by an across-the-board improvement in production volumes, with the manufacturing sector's output increasing by 10.4 percent from 4.9 percent in September.

The other two sectors too posted similarly sharp increases in output. While mining output was up 13.1 percent as against 11.5 percent in September, electricity production jumped by 20.4 percent, sharply higher than the 9.9 percent growth it had posted the previous month.

In terms of the use-based classification of goods, production growth in October was higher for all six categories compared to September:

>> Primary goods: 11.4 percent versus 8.0 percent in September

>> Capital goods: 22.6 percent versus 8.4 percent in September

>> Intermediate goods: 9.7 percent versus 6.1 percent in September

>> Infrastructure goods: 11.3 percent versus 8.9 percent in September

>> Consumer durable goods: 15.9 percent versus 1.1 percent in September

>> Consumer non-durable goods: 8.6 percent versus 3.0 percent in September

With a favourable base effect - thanks to Diwali taking place in October in 2022 but in November in 2023 - resulting in a big IIP growth number for last month, economists warned the picture was not all that rosy.

"While the prospects of infrastructure and construction goods segment remain encouraging, the strong base effect has masked the weakness in the consumer goods segment," said Rajani Sinha, chief economist at ratings agency CareEdge.

While production of consumer durables and non-durables was up 15.9 percent and 8.6 percent, respectively, in October compared to the same month last year, both their indices - which correspond to actual production figures - were 5 percent lower than what they were in the same month of 2021.

In 2021, Diwali had occurred on November 4.

This, according to Aditi Nayar, chief economist at ICRA, suggests that "caution should be employed while interpreting the higher-than-expected IIP expansion" last month.

"Moreover, electricity demand growth had slid from 21 percent in October 2023 to 6 percent in November 2023, before a contraction emerged in early December 2023," Nayar further said, adding that she expects IIP growth to slow down sharply to 2-4 percent in November due to fewer number of working days (on account of the festival season) and an unfavourable base effect.

"Given the shift in the festive calendar, we believe it would be more meaningful to compare the average year-on-year growth performance in October-November 2023 vis-à-vis October-November 2022," Nayar added.

IIP growth has averaged 9.0 percent in October-November 2023 as against 1.8 percent in the same two months last year.

"All said and done, we expect moderation in October-December 2023 real GDP growth," said Nikhil Gupta, chief economist at Motilal Oswal Financial Services.

The IIP is a key input in the computation of quarterly GDP data. In July-September, India's growth rate came in at a far higher-than-expected 7.6 percent, leading to economists - as well as the Reserve Bank of India - raising their forecasts for 2023-24. The government is expected to follow suit and make a similar upward revision to its forecast of 6.5 percent sometime later this month.