Annualized growth in India’s industrial production moved a tad higher in Jul-24, to 4.8%, compared to 4.7% in Jun-24 (revised up from 4.2% earlier). The headline print was broadly in line with market consensus, pegged at 4.7%.

• On a sequential basis, IIP contracted marginally by 0.7% MoM. This is almost in line with the average monthly contraction of 0.3% typically recorded in the month of July (barring COVID years)
• Among the 25 sub-sectors of IIP, 15 registered sequential expansion, while 10 registered a sequential contraction.
• On an annualised basis, growth was led by the index heavy-weight manufacturing sector, which saw growth better to 4.6% in Jul-24 compared to 3.2% in Jun-24. In addition, electricity production offered support, clocking an expansion of 7.9% in Jul-24, albeit lower compared to 8.6% a month ago. 
• Expectedly, mining sub-sector growth decelerated to a 4-month low of 3.7% compared to 10.3% in Jun-24, as a strong pick-up in rainfall activity in Aug-24 (at 16% above LPA) weighed on mining activity. 
• Within the manufacturing industries, the top three performers on an annualized basis were Electrical equipment (28.3%), Other transport equipment (25.5%) and Tobacco products (13.1%). On the other hand, the bottom three performing sectors were Miscellaneous manufactured items (-14.4%), Pharma (-8.1%) and Printing and reproduction of recorded media (-3.6%). 
• On the use-based side, growth was led by capital goods, which quickened to a 9-month high of 12.0% in Jul-24 compared to 3.8% a month ago and an average trend growth of 3.0% over the last 8 months. In addition, headline IIP growth found support in Intermediate and consumer durables production. 
  1. Pace of growth of consumer durables remained brisk at 8.2% in Jul-24 compared to 8.7% in Jun-24, broadly in line with the last 6-month average growth of 10.9%. Having said that, the sharp moderation in passenger vehicle sales (moved into contraction in Jul-Aug-24) amidst a high level of inventories needs to be closely observed as we head into the festive season. Negative surprise in demand, if any, may weigh on auto production in H2 FY25.
  2. Growth in consumer non-durables plunged into a deeper contraction in Jul-24. At -4.4% - the worst performance in close to 2 years. 

Outlook

Industrial production data for Jul-24 appears to be a mixed bag at a granular level. The continuing weakness in consumer non-durables is concerning, as it underscores the fragility in rural demand. In contrast, a strong recovery in capital goods is welcoming as Government capex spending picks up momentum after the election-induced lull. On balance, excluding consumer non-durables, IIP growth improved to 6.5% during Apr-Jul FY25 compared to 4.7% over the same period last year.

The outlook on rural demand recovery remains optimistic, which should perhaps begin to reflect in subsequent readings of IIP as well. Pick-up in rainfall performance as well as its spatial distribution in Aug-24, should prove supportive of rural demand – which already is showing signs of a nascent recovery, via lead indicators such as tractor, two-wheelers and FMCG sales. Anticipation of surplus rains in Sep-24, improvement in reservoir levels, delayed onset of La Nina phenomenon (by Nov-24) – all point towards agricultural production remaining supported over both Kharif and Rabi seasons. In addition, the macro backdrop for a rural demand recovery continues to be facilitated via the recent increase rise in farm wages, moderation in CPI inflation, upward adjustment in MSPs and a continued fiscal backing by the Government.

Having said that, concerns over global demand conditions have risen amidst recent weak economic data, especially from China and LATAM economies. In addition, persistent geopolitical uncertainty and the longevity of higher freight costs continue to remain on watch for their potential impact, especially on manufacturing exports.

Additionally, the lagged impact of tighter interest rates and credit regulations, as well as an unfavourable statistical base over the next few months will cap the upside in IIP growth. The swing in WPI inflation from a contraction in FY24 (-0.7% YoY on average) to positive in FY25 (at 3.0%) would additionally weigh on industry value-add (GVA).

Says Suman Chowdhury, Executive Director and Chief Economist, Acuité Ratings & Research “The IIP growth slightly increased in Jul’24 from June 24. The manufacturing sector growth, which was disappointing in the previous month, has picked up in July thanks to a stronger core sector. However, this is slower than that in Jul’23, constrained by slower production in sectors such as passenger cars. 

In use-based categories, IIP growth declined in half of the categories but was buoyed by capital goods and intermediate goods which reflect the increased capex activity. Consumer non-durables however, slipped further in contraction domain in July, showing a lack of consistency in the mass demand category.

The cumulative industrial output growth in Apr-Jul’24 period stands at a healthy 5.2% although there are signs of a moderation in industrial activity in the second quarter of the fiscal. Nevertheless, the consumer demand in the economy might gain some strength in the upcoming festival season, making the industrial outlook brighter for the rest of this fiscal year.”

Table 1: Annualized growth in IIP and its key components

Chart 1: Growth in consumer non-durables continues to remain dismal, hopes of a rural demand recovery in the near term