India’s IIP growth fell into a contraction of 0.1% YoY in Aug-24, defying expectations of a mild growth (Refinitiv consensus: 1.2%). This marked the first negative print in 22 months, driven by a broad-based sequential deceleration coupled with an unfavourable base at play. 

Key highlights

• In the preceding month, IIP had grown by 4.7% YoY (revised lower from 4.8%). 
• On MoM basis, industrial activity contracted by 2.5% in Aug-24, amidst a broad-based sequential decline. This is much higher than the average monthly contraction of 0.3% historically seen in the month of August
• On annualised basis, mining sector contracted by 4.3% while electricity sector contracted by 3.7%. This fall in mining activity was in line with the weakness seen in core sector output of coal, crude oil and natural gas in the month. 
• Manufacturing was the only sub-sector to register a positive growth of 1.0%, albeit at the slowest pace in 22-months. 
  1. Among the 23 manufacturing sub sectors, 10 registered a sequential expansion while 12 saw a sequential contraction.
  2. Within the manufacturing industries, the top three performers on an annualized basis were Electrical equipment (17.7%), Wearing apparel (14%), and Furniture (13.9%). On the other hand, the bottom three performing sectors were Miscellaneous manufacturing industries (-8.2%), Printing and reproduction of recorded media (-7.1%), and Fabricated metal products (-6.5%).
• On the use-based side, annualized growth was led by Consumer durables (5.2%) and Intermediate goods (3.0%)
  1. Consumer non-durables contracted by 4.5% – marking the slowest pace in past 17-months, despite a favourable base of (-4.5% YoY in Aug-23) 
  2. Growth in investment-oriented sectors of Capital as well as Infra & construction goods eased to a 9-month low, at 0.7% and 1.9% respectively.
  3. Primary goods contracted by 2.6% – the first negative print in 42-months, but on a substantially high base of 12.4%. 

Outlook

The unexpected contraction in Aug-24 industrial activity appears to be driven by adverse base effect as well as deceleration in activity momentum. An intense rainfall in Aug-24, at 16% above the LPA, appears to have weighed on mining, construction and related sectors in a meaningful way. This makes the latest IIP print join a spate of high frequency indicators that have seen a loss in momentum such as – PMI indices, Passenger vehicle sales, E-way bill generation, GST collections, Core infra structure output among others. With this, on a FYTD basis, IIP has grown by 4.2%, much slower than last year’s 6.2% over the same time period. 

Having said, outlook for industrial activity remains mixed: 

• An above normal Southwest monsoon performance in 2024, followed by good prospects of Rabi season (Healthy replenishment of reservoirs, good soil moisture and imminent onset of La Nina phenomenon), augur well for prospects of a recovery in rural income and as well as demand.  Early signs of rural recovery are already reflected in pick up in tractor, two-wheelers and FMCG sales. The onset of festive season should reinforce the momentum. 
• Pick up in Government spending post the election related Q1 lull should augur well for industrial activity. Though for Aug-24, both centre and states capex spending registered a sequential moderation - perhaps induced by excessive rains in the month across the country. 
• On other hand, softening global demand in key economies, such as US, China and Eurozone amidst heightened geopolitical uncertainty (on account of Middle East tensions) could weigh on growth in domestic exports. In addition, lagged impact of monetary and regulatory tightening could lead to urban consumption moderation – the cracks in which are already confirmed by nascent weakness in passenger vehicle sales, dip in urban consumer confidence and a slowdown in pace of credit card outstanding. 

Overall, we expect a moderation in IIP growth in FY25. From a GDP perspective, the swing in WPI inflation from a contraction in FY24 (-0.7%YoY on average) to positive in FY25 (at 2.5%) would additionally weigh on industry value-add.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research “India’s IIP print for Aug-24 has indeed been a shocker, with industrial output contracting by 0.1% as compared to a growth of 4.7% YoY in Jul-24. This is the first time since Oct-22 when IIP has seen a contraction. While a significant decline in output was expected after the release of core sector data earlier, few in the market expected it to contract on an annualised basis. Clearly, the base factor is a key factor along with excess rains in some parts of the country which would have had an impact on not only mining but also manufacturing activity as compared to last year. Nevertheless, weaker IIP data is likely to have an impact on the GDP growth for Q2FY25 with increased downside risks on the 7.0% forecast by RBI.

The manufacturing sector saw a modest output growth of 1.0% while mining and electricity had a significant contraction of 4.3% and 3.7% respectively. Overall consumer goods output has contracted by 0.6%, the first time in 9 months with a substantial 4.5% YoY drop in non-durable output. While such data points need to be monitored in the subsequent months, it may be noted that the cumulative industrial growth in the Apr-Aug’24 period still stands at 4.2% YoY.   

We expect industrial activity to pick up significantly from Oct’24 with an acceleration in government spending on infrastructure projects. However, we expect a moderation in IIP growth to 4.0-4.5% in FY25.”

Table 1: Annualized growth in IIP and its key components

Chart 1: IIP growth slips into a contraction in Aug-24, after a gap of nearly 2 year