India’s industrial production growth moderated to a 6-month low of 2.9% YoY in Feb-25 from 5.2% (revised up from 5.0% earlier) in Jan-25. While market participants were expecting some moderation, with consensus estimates lying in the range of 3.6-4.0%, the actual outturn was softer.

Key highlights

• On a sequential basis, the IIP index contracted by 6.3% in Feb-25. The monthly contraction in Feb-25 has not just overshot the series median contraction of 4.6% associated with the month of February, but it is also the deepest in the current series.
• While manufacturing and mining sectors are anticipated to recover. The electricity sector holds firm and is going to be better with the early onset of extreme heat and is projected to stimulate demand for durable cooling products, thus positively impacting relevant firms and maintaining elevated electricity consumption in the immediate term. 
• Among the 25 sub-sectors of IIP, 4 registered a sequential expansion, while 21 saw a sequential contraction.

Sectoral classification (annualised comparison)

• On an annualised basis, IIP for the Mining, Manufacturing and Electricity sectors for the month of Feb’25 stands at 2.9%,1.6% and 3.6%.
  1. The drag on growth was primarily on account of the Mining and Manufacturing sectors. In contrast, the Utilities sector posted a mild improvement. 
  2. Within manufacturing industries, the top three performing subsectors were Computer, electronic and optical products, Electrical equipment and Motor vehicles, trailers and semi-trailers. On the other hand, the bottom three laggards were Leather, Paper, and Printing and reproduction of recorded media.

• On Use-based classification (annualized comparison)
  1. Annualized growth was led by investment-oriented sectors of Capital goods and Infrastructure & construction goods. 
  2. Meanwhile, Primary, Intermediate and Consumer goods all posted weaker growth. Consumer non-durables posted their third consecutive monthly contraction. 

Outlook

The moderation in headline IIP growth is broadly in line with most of the leading indicators (like PMI Manufacturing, Core sector index, automobile sales, tractor production, etc.) that were hinting at a letup in activity levels for Feb-25. 

For the month of Mar-25, it is likely that IIP shows a leg up on account of year end seasonal activity along with US export-oriented manufacturers maximizing production before the anticipated imposition of reciprocal tariffs from Apr-25.

• While the reciprocal tariff of 26% imposed on India from Apr 9^th is much higher than expected and will dampen manufacturing activity exposed to the US, the 90-day temporary suspension offers a reprieve.
• It is likely that this temporary reprieve window offered by President Trump is used by domestic manufacturers to front load their US exports to the extent possible.
• However, the benefit of temporary suspension will not be applicable to Automobile components, Steel, and Aluminium – a higher tariff rate of 10-25% announced on these items was not covered under reciprocal tariffs announced by President Trump on Apr 2^nd. 

Going forward, the uncertainty with respect to the first-order impact of US tariffs, along with the second-order impact, could weigh upon domestic industrial activity. 

• Electrical and mechanical machinery, Textiles and products, Gems and jewellery, Pharmaceutical products, and Mineral fuels are the top five vulnerable sectors exposed to the US – cumulatively, they had a share of ~65% in India’s exports to the US during Apr-Jan FY25.   
• The expected rollout of a Bilateral Trade Agreement between India and the US later this year could potentially provide clarity on market access and bilateral tariffs. As widely reported, India’s commerce ministry is expediting the first leg of the BTA within the 90-day tariff suspension period.

Beyond trade uncertainty, domestic drivers of industrial production remain supportive.

• Urban consumption is likely to find support from the income tax relief provided in the FY26 Union Budget, along with the lagged impact of ongoing monetary easing. 
• For the second year in a row, rural consumption could benefit from the likelihood of a normal monsoon. As per the private weather forecaster Skymet, rainfall during the upcoming southwest monsoon season spanning Jun-Sep months, is expected to clock a 3% surplus over the long period average.
• The finance ministry has instructed all ministries and departments to front-load their capex spending to bolster domestic capacity and growth amid an uncertain global environment.

Overall, we hope that the headwinds and tailwinds to industrial activity would broadly offset each other. This could result in a range-bound GDP growth performance in FY26 vis-à-vis 6.5% estimated for FY25.

Below is Acuité Ratings & Research Limited's comment:

“The IIP growth came in at 2.9% YoY in Feb 2025, with a noticeable deceleration from 5.2% in Jan. This is mainly due to a material slowing in mining and manufacturing and is partly made worse by the base effect. The manufacturing sector, which holds the lion’s share of the IIP weight, expanded by 2.9%, its lowest level since last August, showing subdued rural and semi-urban consumption trends.

From a use-based perspective, capital goods posted an impressive 8.2% growth, hinting at a gradual revival in investment activity, while infrastructure and construction goods maintained a strong 6.6% growth, largely aided by government-led capex. That said, consumer non-durables registered a contraction for the third consecutive month due to persistent demand-side fragility, especially in staples.

On a cumulative basis (April–Feb), IIP growth stands at 4.1%, compared to 6.0% last year. The electricity sector remains a consistent outlier with 5.0% growth, and we will continue to see it growing for the next few months as the demand for electricity increases due to the onset of summer. While we are seeing the industrial sector post uneven numbers, this volatility flags the risk of plateauing momentum. The divergence between investment and consumption needs close monitoring in the run-up to FY26.”

Table 1: Annualized growth in IIP and its key components

Chart 1: Merchandise exports have a moderate correlation with IIP