Annualized growth in India’s industrial production eased to a 5-month low of 4.2% in Jun-24 from 6.2% in May-24 (revised up from 5.9%). The headline growth was lower than market expectations pegged at 5.5%.

A granular look:

• On sequential basis, IIP contracted by 3.0%MoM. This is marginally higher than the average monthly de-growth of 2.3% seen in the month of June historically (barring COVID years). 
• Among the 25 sub sectors of IIP, only 7 registered a sequential expansion while 18 saw a sequential contraction.
• On annualised basis, growth was led by Mining sub-sector, which rose by 10.3% - an 8-month high, reflecting the strong demand for electricity amidst lingering heatwaves in several parts of the country as well as subdued monsoon that kept the mining activity humming. Manufacturing growth eased to a 7-month low of 2.6% in Jun-24 from 5.0% in Apr-24. 
• Within the manufacturing industries, the top three performers on an annualized basis were Electrical equipment (28.4%), Furniture (16.0%) and Computer, electronic & optical products (10.7%). In contrast, the bottom three performing sectors were Miscellaneous manufactured items (-12.6%), Tobacco products (-10.9%), Printing & reproduction of recorded media (-3.9%YoY) and Leather products (-3.9%). 
• On the use-based side, annualized growth witnessed a broad-based slowdown vis-à-vis previous month. Growth was however supported by Consumer durables and Primary goods. On the other hand, growth in consumer non-durables once again slipped into a contraction, while rest of the sub-sectors recorded subdued growth in low single digits. 

Outlook

The typical sequential contraction seen in the month of June, was exacerbated this year by the lingering heatwaves and General elections/New government formation. Several companies reported subdued demand conditions, which likely spilled over on to the supply side as well. Looking through monthly volatility, IIP growth averaged at 5.1% in Q1 FY25, same as Q4 FY24 but marginally higher than 4.8% recorded in Q1 FY24.

Some high frequency indicators had pointed towards growth momentum slowing into Jun-24, though there were mixed signals. 

• GST collections remained stable, at Rs 1.74 tn in Jun-24 and May-24
• Core sector growth slipped to 3.9% in Jun-24 from 6.3% in May-24
• E-way bills generated marginally eased to 1.0 bn in Jun-24 from 1.03 bn in May-24
• PMI manufacturing rose to 58.3 in Jun-24 from a 3-month low of 57.5 in May-24, led by improvement in business conditions and increase in hiring.

Going forward, the following macroeconomic trends would determine the trajectory of industrial activity in FY25

• Anticipated uptick in consumption, led by rural demand amidst continued fiscal support, increase in rural agri wage growth at a faster clip as well as sharp improvement in rainfall performance in Aug-24. The prognosis of onset of La Nina augurs well for second half of monsoon performance. 
• FY25 Union Budget by the new government announced double-digit growth in outlay to rural and agri sectors, with strong focus on housing via PMAY scheme, in both rural and urban areas. 
• Continued support from public capex, pegged at a two decade high of 3.4% of GDP in the Union Budget. Hopefully, this is likely to get supported by broadening of private capex cycle in the coming months. 
• On the flip side by the geopolitical uncertainty as well as imminent growth slowdown in China and US needs to remain on watch.  

Although most factors remain in support of industrial activity, 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.

Says Suman Chowdhury, Executive Director and Chief Economist “Expectedly, the IIP growth has slowed down in Jun’24 to 4.2% from 6.2% in May’24. One of the key factors is the decline in manufacturing sector growth to 2.6% from 4.6% in the previous month. Slowdown of manufacturing and construction activity due to excessive summer heat conditions in many parts of the country in June apart from inventory rationalization in some sectors such as auto has impacted IIP. Consumer non-durables output has again slipped to contraction mode at -1.4% in Jun’24 vs 2.3% in May’24, highlighting that the demand from the rural sector is not yet robust.

Given the lower industrial output in the first quarter along with lower than expected corporate profitability, weaker GVA growth in the manufacturing sector may pull down GDP growth in Q1FY25 to below 7.0%. However, an expectation of a strong revival in rural demand and better export prospects in the second half of the year may enhance IIP growth in the subsequent quarters.”

 Table 1: Annualized growth in IIP and its key components

Chart 1: E-way bills generated eased marginally in Jun-24