The positive side of India’s heat wave, industrial production to stay steady around 5% level: Economists

Coal, electricity to keep industrial growth steady in May, June

Heat wave is likely to impact farm incomes and inflation negatively, but economists contend that it may end up having a positive impact for industrial production.

Experts indicate that industrial growth will likely stay steady around 5% in the coming months, as electricity and coal production will keep the sector humming. Electricity has a 8% weight in the index, whereas mining account for 14.4% share.

“The impact of the heatwave is clearly visible through high frequency indicators such as coal production, electricity demand, etc. They were quite robust in April 2024 and helped in lifting up the IIP to touch 5%,” said Paras Jasrai, senior analyst, India Ratings.

Coal production was 7.5% in April compared with 8.7% in the previous month and 9.1% in April 2023. Electricity generation had expanded 9.1% in April rising from 8.6% in the previous month, and a 1.1% contraction in April last year.

The index of industrial production eased to 5% in April from 5.4% in the previous month, but stayed above the 5% mark for third consecutive month.

“Industrial output growth may stay around that level in May and June,” said Jasrai.

Electricity generation was up 15% on year in May 2024, whereas coal production was up 10%.

Economists point out that it is not just electricity and coal that will contribute to Index of Industrial Production, a push may also come from some of manufacturing firms.

“Besides, a big boost for power and mining, it also increases demand for cold drinks and ice creams. Add to that air conditioners. Both durable and non-durables are likely to witness upside,” said Madan Sabnavis, chief economist, Bank of Baroda.

While consumer durable production growth was robust at 9.8% in April 2024 compared with 5.3% in the previous month, non-durable production contracted by 2.4% compared with 5.3% in the previous month.

Consumer non-durables are products, which are directly used by consumers and can't be preserved for long periods.

Consumption demand lagged in FY24, as manufacturing, construction and investment helped keep economy growing.

“Heatwave conditions will drive electricity demand, and that is a boost to IIP. But the full impact will have to take into account the loss in disposable income for consumers. Expected spell of good rains may curb any meaningful impact from full year perspective,” said Abhishek Upadhyay, Senior Economist, ICICI Securities.

The Indian economy expanded 8.2% in FY24—a third consecutive year of over 7% growth. International organisations and global rating agencies contend that a strong domestic market will likely keep the economy humming in the current fiscal as well.

Fitch, in its latest forecast upgrade for India, noted that the recovery in consumer spending with elevated consumer confidence will be one of the factors driving economy in FY25.

The global rating agency projects economy to grow 7.2% in FY25, in line with RBI’s forecast.