IIP – Broad-based slowdown

12 Oct

IIP – Broad-based slowdown

IIP – Broad-based slowdown

IIP for August contracted 1.1% YoY vis-a-vis 4.3% YoY growth last month and expectation of 2% YoY growth. Given the volatility in monthly numbers, we prefer to analyse it on a trend basis (3MMA). On this basis, IIP decelerated to 1.7% YoY (from 3.6% YoY last month) with a broad-based slowdown and contraction in 14 out of 23 manufacturing subsectors. The slowdown is particularly pronounced in consumer durables, capital goods and infrastructure with growth thereof at a series-low. However, consumer non-durables and intermediate goods (>5% growth) fared better. Meanwhile, labour-intensive segments (textiles, gems & jewelry, leather goods, etc) continue to remain weak.

We expect IIP growth to hover around current levels in the near term. The base effect is turning supportive, but domestic demand and exports are likely to remain weak. Over the medium term, we do expect a modest recovery in IIP on the back of easing liquidity conditions, downtrend in lending rates and some trickle-down of the recent corporate tax cut. In case the government undertakes bigger fiscal expansion, recovery could gather steam in our view. Else, there are downside risks to FY20 GDP growth forecast, especially given the deepening of global slowdown (Global gusts over monetary momentum).

IIP growth surprises on the downside

Headline IIP for August fell 1.1% YoY versus 4.3% YoY in July. Given the monthly volatility in data, we prefer to analyse it on a 3MMA basis. On this basis, IIP grew at a meager 1.7% YoY versus 3.6% YoY in July. By component, electricity and manufacturing slowed to 4% and 1.3%, respectively (versus 7% and 3%, respectively in July).

Broad-based slowdown; more pronounced in cap goods and durables

There is broad-based slowdown in industrial activity with 14 out of 23 subsectors contracting – worst breadth in the series. By segment, capital goods and consumer durables fell sharply: -12% YoY and -6% YoY on a 3MMA basis. This is a series low. Weakness in global trade and domestic consumption is now weighing on IIP capital goods. Intermediate goods (though having also slowed) and consumer non-durables are doing relatively better, growing 11% YoY and 7% YoY, respectively, on a 3MMA basis. Even labour-intensive segments (such as textiles, gems & jewelry, leather goods, etc) remain weak—the output is flat for two years and 10% below the pre-DeMon peak.

IIP to hover around current levels

In our view, IIP is likely to hover around current levels. While the base effect is somewhat supportive, global trade remains tepid and domestic business sentiment quite weak. The good news is that liquidity has begun to improve and transmission is likely to accelerate. This, we argue, will charge economic momentum with a lag. The impact of corporate tax cuts can also help arrest the downside somewhat. Downside risks may materialise if the global economic slowdown intensifies.

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