November factory output up 7.1%; inflation under 6% in December

The Index of Industrial Production (IIP) had posted a growth of 1.0 per cent a year ago and a contraction of 4 per cent in October, which was now revised downwards to 4.2 per cent in Thursday’s release. Manufacturing output, which accounts for 77.6 per cent of the weight of the IIP, grew by 6.1 per cent in November as against a 0.3 per cent growth in the corresponding period a year ago.

The maximum increase in the growth in November was seen for the manufacturing of transport equipment, motor vehicles, trailers and semi-trailers, food products and beverages, while the maximum decline was seen for manufacturing of wearing apparel, textiles, coke and refined petroleum products.

Experts said though the rebound in industrial output, especially manufacturing, was more than expected, the recovery may not sustain as high frequency indicators have slowed down in December as against November. “While we had expected the IIP performance to rebound, the print was much stronger than expected at 7.1% in November 2022 as compared to the woeful contraction of 4.2% in October 2022, with a reversal of the base effect related to an early festive season. However, the YoY growth of most available high frequency indicators has moderated in December 2022 relative to November 2022, partly reflecting an unfavourable base related to the post-festive season rebound seen in December 2021. In line with this, we expect the overall IIP growth to moderate to low single digits in December 2022,” Aditi Nayar, Chief Economist, ICRA said.

Unlike previous few months, all segments at the use-based classification such as consumer durables and non-durables recorded growth in November. “The last such month in which all use-based segments had recorded positive growth was June 2022. The strong double digit growth witnessed in capital and infrastructure goods though on a low base is a welcome change after a dismal performance in October 2022,” Sunil Sinha, Principal Economist, India Ratings and Research (Ind-Ra) said.

Capital goods output — a proxy for investment sentiment — grew at 20.7 per cent in November as against a contraction of 2.6 per cent a year ago. Consumer durables and consumer non-durables output – an indicator of fast moving consumer goods – grew at 5.1 per cent and 8.9 per cent, respectively, as against a contraction of 5.7 per cent and 0.8 per cent in the same period a year ago, respectively.

The uptick for consumer goods may not sustain. “Both these segments (consumer durables and non-durables) are expected to face headwinds from erosion of household income due to high inflation and reversal of interest rate cycle going forward. Despite the encouraging IIP November 2022 numbers, Ind-Ra believes the recovery in factory output has a long way to go,” Sinha said.

On the retail inflation front, it slowed down for the second consecutive month to 5.72 per cent in December from 5.88 per cent in November and 6.77 per cent in October 2022. It was 5.66 per cent in December last year. Food inflation, which accounts for nearly 47 per cent of the CPI basket, eased to 4.19 per cent in December from 4.67 per cent in November but was higher than 4.05 per cent last year. Fuel inflation increased to 10.97 per cent in December from 10.62 per cent in November.

The moderation in inflation, however, is unlikely to give much comfort to the Reserve Bank of India as most of it is coming on account of food prices, especially of vegetables, while core inflation — non-food, non-fuel component — continues to remain high. “The inflation moderation so far in India remains primarily in food inflation, as the pass through of falling energy prices has not yet fed through to India’s inflation numbers, both in motor fuel and also cooking gas prices. If anything, public transport prices continue to trend higher, as evident from recent price increases announced in New Delhi. Core inflation remains elevated above the target range…despite two months of below 6% headline inflation, we think the RBI is unlikely to feel very comfortable with the details, given demand-driven price pressures remain elevated. We expect the central bank to maintain a broadly hawkish policy stance going into the February monetary policy meeting and deliver a 25bp hike, taking the repo rate to 6.50%,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said.