Industrial Output Slows to 3-Month Low in June

Growth in India’s industrial production unexpectedly slowed to a three-month low of 3.7% in June compared to 5.3% in the previous month. This is lower than our projection of 4.4% growth for the month. The disappointing performance in industrial output can mainly be attributed to the moderation in the manufacturing sector’s output. The other concerning aspect was the weakness seen in the consumer goods segment wherein the growth in output of consumer durables recorded a sharp contraction. Also, growth in the output of consumer non-durables decelerated during the month. The manufacturing sector output moderated to a three-month low of 3.1% in June after recording modest growth in the previous two months. Within the manufacturing sector, a year-on-year contraction was witnessed in 14 out of 23 categories. The output of basic metals (a major component with a 12.8% weight in overall IIP) grew by 13.6% in June compared to 9% in May. A weak performance was seen in the export-intensive sectors such as textiles (-0.3% growth) and wearing apparel (-23.3%) which is reflective of subdued external demand conditions. Electricity output rebounded with a growth of 4.2% in June following a subdued performance in the last three months. Overall, while the electricity and mining sectors supported the overall industrial activity, slowing growth in the manufacturing sector weighed on the overall IIP growth. Within the use-based classification, the output of infrastructure and construction goods continued to record double- digit growth for the third month in a row rising by 11.3% in June. While capital expenditure by the states has been lagging, the central government has maintained its thrust on capex. Going ahead, the improving capacity utilisation levels and deleveraged corporate balance sheets signal encouraging prospects for the revival of private capex in the economy. These factors are expected to be the tailwinds that will support the output in infrastructure-related segments. The output of consumer durable goods disappointed with a sharp contraction of 6.9% in June as against a growth of 1.2% in the previous month. Growth in output of consumer non-durable goods recorded a sharp deceleration as it grew by a dismal 1.2% in June as against 8.4% in the previous month. With external demand conditions likely to remain weak, the performance of industrial activity hinges on a durable recovery in domestic demand conditions. Way Forward Moderation in the manufacturing sector's output weighed on the overall industrial activity during the month despite modest performance in the mining and electricity sectors. With slowing global growth, we expect weakness in external demand to persist. On the domestic front, a durable recovery in demand remains important for industrial activity. Domestic demand faces headwinds from the uptick in inflation fuelled by an acceleration in food prices. Moreover, weather-related uncertainties could play a spoilsport for the recovery in rural demand.