Annualized growth in India’s industrial production accelerated to a 7-month high of 5.9% in May-24 from 5.0% in Apr-24, to outpace market expectations pegged at 4.9%.

A granular look:

• On sequential basis, IIP expanded by 4.4%MoM. This is marginally lower than the average monthly increase of 5.0% seen in the month of May historically (barring COVID years). 
• Among the 25 sub sectors of IIP, 23 registered a sequential expansion while only 2 saw a sequential contraction, namely Food products and Miscellaneous manufactured items
• On annualised basis, growth was led by Utilities sub-sector, which rose by 13.7% - a 7-month high, reflecting the strong demand for electricity amidst heatwaves in several parts of the country. Manufacturing too saw growth improve to 4.6% in May-24 from 3.9% in Apr-24. Offsetting these, was a marginal deceleration in the Mining sector growth to 6.6% YoY from 6.8% previously. 
• Within the manufacturing industries, the top three performers on an annualized basis were Furniture (23.2%YoY), Computer, electronic & optical products (20.1%), Other transport equipment (16.8%YoY). On the other hand, the bottom three performing sectors were Miscellaneous manufactured items (-8.6%), Food products (-5.5%YoY) and Printing & reproduction of recorded media (-2.8%YoY).
• On the use-based side, annualized growth was led by Consumer goods – i.e., both non-durables as well as durables, reflecting the strength in two-wheeler and air conditioner sales in the month. Consumer durables output logged in a double digit growth of 12.3% YoY in May-24 while non-durables production improved to 2.3% YoY from a contraction seen in the previous month. Growth in capital intensive sectors of Infrastructure & Construction Goods, Intermediate goods and Capital goods were relatively muted, capturing the sharp slowdown in government capex disbursal amidst the election season.

Outlook

After recording best back-to-back years of growth over FY23-24, IIP growth has commenced FY25 on a positive note. On a FYTD basis (Apr-May), IIP growth stands at 5.4% vs 5.1% YoY for the same period in FY24.

Most high frequency indicators had pointed towards growth momentum continuing into Jun-24.

• GST collections remain stable, at Rs 1.74 lakh Cr in Jun-24 i.e., comparable to May-24 levels
• Core sector’s growth remains healthy, averaging at 6.3% over the last 3 months (Mar-Apr-May) compared to 4.7% over the same period in 2023.
• PMI manufacturing rose to 58.3 in Jun-24 from a 3-month low reading of 57.5 in Jun-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, recent increase in rural wage growth at a faster clip as well as expectation of a favourable monsoon in 2024. It is largely expected that the revised FY25 Union Budget by the new government could raise welfare spending to support consumption demand, especially in rural economy.  
• Continued support from public capex. Higher than budgeted RBI dividend (Rs 2.11 tn) is likely to back government’s commitment towards infrastructure development, even as it remains on track to achieve a reasonable fiscal consolidation. 
• Lagged impact of interest rate and tightening of credit conditions
• Even as geopolitical risks persist, upgrades to global growth outlook offers respite and can facilitate a revival in export growth. The IMF projects World GDP growth to stay unchanged at 3.2% in 2024 and 2025 (same as in 2023). 

As such, we believe IIP growth (i.e., volume based) could remain on a moderate turf hereon. Having said, GVA in industry could be lower amidst the expected change in input price inflation from a contraction in FY24 (WPI inflation average: -0.7%) to positive (at 3.0%) in FY25.

Says Suman Chowdhury, Chief Economist and Head-Research“ Industrial output in May-24 has been significantly better than expectation at 5.9% YoY, supported by steady output in the manufacturing and the mining sector along with a double digit  growth in electricity output. Sharply higher power demand reflects more severe summer heat conditions across India which has led to steadily rising usage of household air conditioners and also higher usage of water pumps. The electricity index has been at an all-time high with a sequential growth of 8.2% in May-24. Among the use based sectors, consumer durables has been an outperformer due to higher demand and production of cooling equipment.

We expect the manufacturing sector to continue with the current momentum given the continuing thrust on the infrastructure sector. However, the moderation in mining and power generation growth in the subsequent months may lower industrial growth which will still be healthy at 5.0% in FY25. This will support our GDP growth forecast of 6.8% in the current fiscal.”  

Table 1: Annualized growth in IIP and its key components

Chart 1: PMI manufacturing bounced back in Jun-24