IIP - In weak form : Edelweiss PDF Link

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IIP growth in February at ~4.1% YoY was lower than the expected ~7.0% while January’s number was revised down drastically to ~1.1% from 6.8% earlier, predominantly on account of consumer non-durables. Given the volatility and influence of base effect in IIP, we use the more stable MoM 3MMA seasonally adjusted data to assess the activity trend. On this basis, we infer that though industrial activity has emerged from an extremely weak phase, recovery is weak and fragile. Moreover, pace of expansion in February has dipped further. Going forward, for a turnaround in business cycle, policy action needs to pick up to boost business confidence besides rate cuts, which we expect to commence with a 25bps cut in April.

January IIP revison a significant surprise

IIP growth for February at ~4.1% YoY came in lower than our expectation of ~7.0% due to lower growth in consumer goods (at abysmal ~0.2%). Moreover, invalidating our basis of strong consumer growth, that for January was also revised down sharply to ~3% YoY from ~22% earlier. Ergo, January’s IIP growth saw a drastic cut to ~1.1% YoY from 6.8% earlier.

Surge in IIP in February (~4.1%) compared to January (~1.1%) was primarily on account of the base effect.  Given the volatility in monthly (YoY) data and influence of base effect, we use a much reliable gauge of MoM, 3MMA (adjusting for seasonality) to understand trends. On this basis, IIP data reflects some increase in production; however, the pace of expansion in February seems to be slowing down. Notably, in February sequential growth was at ~0.5% versus ~2.3% in January (SA MoM, 3MMA).

Mining picking up while electrcity losing steam

Manufacturing growth rose in February after a couple of months of weak numbers predominantly on account of base effect. Further, mining activity also turned positive after lounging in negative territory over the past six months as coal production is picking up pace from an extreme weak phase. Meanwhile, electricity growth, which had dipped in January, also posted an uptick. However, on MoM 3MMA seasonality adjusted (SA) basis (which adjusts for the base effect and seasonality and hence is a better metric), manufacturing and mining growth posted an uptick from an extreme weak phase in October, although the pace of recovery is weak. And, interestingly, electricity growth is slowing down since November and has infact turned negative in February on sequential basis.

Among eight core industries, natural gas was in contraction zone while cement and coal production registered healthy growth. Overall, core sector growth came in at ~6.8% (YoY) for February against a weak ~0.7% in January.

IIP - In weak form

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