Industrial growth contracts for first time in 22 months in August

India's industrial activity slowed in August

India's industrial growth shrunk for the first time in 22 months by 0.1 percent in August compared with 4.7 percent in the previous month owing to an unfavourable base, according to data released by the government on October 11.

Industrial growth had expanded 10.9 percent in August 2023.

However, experts indicate that the low number may not be a concern.

“While unpalatable, the marginal contraction of 0.1 percent displayed by the IIP in August 2024 is not alarming, as it largely reflects the temporary dousing of mining output, electricity demand and retail footfalls by the heavier than normal rains, as well as an unfavourable base," said Aditi Nayar, chief economist, Icra.

India’s core sector output, which accounts for 40 percent of the weight in the index of industrial production, contracted in August by 1.8 percent compared with 6.1 percent growth in the previous month.

August month marked the first contraction in the growth of infrastructure industries in nearly four years.

Slowdown across sectors

While growth in all three major industries, mining, manufacturing and electricity slowed down in August. Manufacturing was able to stave off contraction with 1 percent growth.

"Out of the 23 distinct sectors in manufacturing 11 witnessed negative growth while 12 registered positive growth. Industries like computers and electronics, readymade garments and furniture had witnessed sharp declines last year and hence were buoyed by this statistical effect," said Madan Sabnavis, chief economist, Bank of Baroda.

Mining, on the other hand, contracted 4.3 percent to its lowest level in 45 months, whereas electricity had contracted to a 50-month low.

The use-based industries also witnessed a slump compared with the previous month, with consumer non-durables continuing its third consecutive month of contraction and durables growth lsowing down to 5.3 percent from 8.3 percent in the previous month. There was a sharp deceleration in capital goods as well with growth falling to 0.7 percent from 11.8 percent in the previous month.

HSBC data had shown that manufacturing activity had also slumped to a three-month low of 57.5 in August due to tepid export demand.

India’s merchandise exports shrunk by 9.4 percent in August, pushing the trade deficit to a 10-month high.

Outlook

However, economists contend that growth may have bottomed out in August.

"We may expect growth rates to be better from September onwards with a peak being achieved by October end which would be the post-harvest and festival season when spending typically increases," said Sabnavis of Bank of Baroda.

India Ratings and Research (Ind-Ra) expects IIP to expand 3 percent in September.

"The high frequency indicators indicate a pickup in industrial activity. The growth of e-way bill and coal production improved to 18.5% yoy and 2.5% yoy in September 2024, respectively (August 2024: 12.9% yoy, negative 7.5% yoy)," said Paras Jasrai, senior analyst at Ind-Ra.

However, Nayar cautioned against reading too much in the data as she noted that base effects are likely to "muddy" any analysis on growth.

The Indian economy grew 6.7 percent in the first quarter, RBI expects growth to pick up from second quarter onwards and rise to 7.4 percent in the second half of the year.

The central bank's monetary policy held the policy rate at 6.5 percent for the tenth consecutive time at its meeting this week, with dissent from a newly appointed member Nagesh Kumar, who batted for a 25 bps rate cut.