Industrial production to remain buoyant

by Madhumita Gokhale

Industrial activity in India recovered from the Covid-19-induced shock in 2021-22. This was reflected by the index of industrial production (IIP), which grew by 11.4 per cent over 2020-21. It came on the back of the 8.5 per cent contraction seen in 2020-21. Compared to the pre-Covid year of 2019-20, growth in 2021-22 was of 1.9 per cent.

We expect industrial production in 2022-23 to grow by 4.8 per cent over the previous year. This would come on top of the high growth seen in 2021-22 and would remain higher than growth seen in previous years. The IIP had been growing at 3.8 per cent p.a. between 2012-13 and 2018-19.

The 11.4 per cent increase in 2021-22 followed two years of decline in production. The recovery was not uniform across components. Electricity generation in 2021-22 improved by 7.4 per cent compared to the pre-Covid level of 2019-20. Mining output also grew sharply by 3.4 per cent in a similar comparison.

The manufacturing sector, in contrast, saw an increase of only one per cent in its output compared to 2019-20. Only eight of the 23 sub-groups in the manufacturing sector witnessed improvement in output compared to the pre-Covid level. These include basic metals, other non-metallic minerals, chemicals, pharmaceuticals, food products, textiles and rubber & plastic products.

The first quarter of 2022-23 is likely to see sharper growth compared to the subsequent quarters. We expect the IIP to grow by 9.9 per cent y-o-y in the June 2022 quarter. The higher growth would come on the back of lower levels of production seen in the corresponding quarter of the previous two years. Growth is then expected to slow down to 2.5 per cent, 3.9 per cent and 3.3 per cent in the next three quarters.

Industrial growth in 2022-23 is likely to be driven by the manufacturing sector. We expect manufacturing output to grow by 5.2 per cent. Components including basic metals, other non-metallic mineral products, motor vehicles, machinery and food products are expected to contribute substantially to this growth in output.

Output of basic metals is projected to grow by 6.5 per cent. This component has a weight of 12.8 in the total index. Production of finished steel, which is a major commodity under this sub-group, is expected to see healthy growth in 2022-23. The steel industry saw substantial capacity additions of over five million tonnes in 2021-22 and could see similar additions in 2022-23. Steel exports could weaken due to the recent export duties imposed by the central government in May 2022. But the share of exports stands at less than 12 per cent of total steel production. Domestic demand for steel from the construction sector is likely to remain strong in the current year.

Other non-metallic minerals, which includes cement, is also expected to see considerable growth in output of 5.2 per cent. Demand for cement from both real estate and infrastructure sectors is likely to be robust. Cement producing capacity has seen significant additions in the past three years. This would be sufficient to meet the rise in demand for cement that could occur in the current year.

Production of motor vehicles is projected to grow by over seven per cent. This would come on the back of a marginal increase of 1.2 per cent in 2021-22, following two years of decline in production. We expect growth in demand for commercial vehicles to remain high in 2022-23, reflecting the buoyancy in infrastructure and e-commerce sectors. Preference for personal mobility could lead to continued high demand for passenger vehicles. Growth in demand for two and three wheelers is expected to be slightly less pronounced. But overall automobile production could be adversely affected if supply-chain problems such as shortage of semiconductors persist due to prolongation of the Russia-Ukraine war.

Compared to manufacturing output, growth in mining output and electricity generation is expected to be lower. We expect mining output to grow by 2.3 per cent in 2022-23. Output of crude oil and natural gas is likely to be subdued. Demand for coal could remain high due to expectations of increased electricity generation.

Electricity generation is expected to grow by 4-5 per cent. The strong growth in output of energy-intensive industries such as iron & steel that is expected in 2022-23 would boost demand for electricity.