IIP growth falls to 2.4% as demand slows

Manufacturing and electricity sectors reported a sharp moderation in growth, while mining contracted, prompting economists to pin hopes on festival season demand for industrial recovery. But the tightening of monetary policy may impact investment in the manufacturing sector, they said.

Index of industrial production (IIP) growth fell to 2.4% in July from 12.7% in June, data released by the National Statistical Office showed on Monday.

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While the overall IIP for July is 2.1% higher than the pre-covid level of July 2019, consumer durables sector comprising white goods was lower 6.8% and consumer non-durables comprising inelastic demand was 2.5% lower compared to the pre-covid level.

“The IIP growth plunged in July… trailing our expectation of 4%…an unfortunate but expected fallout of the base normalization, heavy rainfall in some areas, and the shift in discretionary consumption to contact-intensive services,” said Aditi Nayar, chief economist, ICRA.

Manufacturing, which accounts for 77% of the index, reported a 3.2% growth in July compared to 12.9% growth in the previous month.

“The major drag has been consumer goods with FMCG showing negative growth. The higher growth in capital goods is due to low base plus revival in part of the auto sector and not reflective of investment picking up,” said Madan Sabnavis, chief economist, Bank of Baroda.

The key to the future will be recovery in consumer goods in August-October given that the festival season has started early which should reflect higher demand, he added.

The capital goods sector grew by 5.8% in July compared to 26.1% in June.

Consumer durables, representing elastic demand saw growth decline to 2.4% in July compared to 23.8% growth in the previous month.

Consumer non-durables, on the other hand declined by 2% in July compared to a 2.9% growth in June.

“The consumer non-durables segment continues to be an area of worry… Rebound of the consumer non-durable segment is critical for a sustained and broad based industrial recovery. Going forward, the recovery in this segment looks challenging due to the squeezing of the purchasing power of the households as wage growth is lagging behind inflation,” said Sunil Kumar Sinha, principal economist, India Ratings and Research.

Nine of the 22 manufacturing sub-sectors reported a contraction in output, including food products, tobacco products, leather products and electrical equipment.

Electrical equipment output declined sharply by 15.6% in July.

While the IIP in the first quarter of the current fiscal grew by 12.7%, the national accounts data for the June quarter released last month showed the economy grew below expectations at 13.5% due to dismal performance of the manufacturing sector.

In fact, global ratings agency Moody’s Investors Service last week sharply lowered India’s economic growth forecast for 2022 to 7.7% from 8.8% estimated earlier on the back of monetary policy tightening, uneven distribution of monsoon and slowing global growth.

Nayar of ICRA said that high frequency indicators for August point at a mixed trend. “On balance, we expect the IIP to report 4-6% YoY growth in August,” she said.

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