Factory output: Is the economy slowing down?

What shock did the August IIP throw-up?

The IIP in August registered a negative y-o-y growth of 0.1%, compared with the robust 10.9% growth seen in the same month last year. This was the first contraction since October 2022 when the factory output index fell by 4.1%. The government blamed the contraction on excessive rains in August, which hurt mining activity. Mining fell by 4.3%. Electricity generation fell by 3.7% and manufacturing output grew by just 1%. In July 2024, IIP grew by 4.7%. Typically, the factory output declines in August compared with July. It’s the steep 2.5% fall—higher than the previous 12-year average of 0.2%—that surprised.

Read more: MGNREGS work demand falls in FY25 as spending slows and rains lash

Is this contraction a one-off event?

Experts think so. According to them, the negative growth came about mainly on account of two factors—a high base effect as the August 2023 index was sharply up, and the unusually heavy rainfall in August, which affected mining activity in a big way. It also impacted power generation. Experts are of the opinion that IIP will return to positive growth from September as high-frequency indicators such as e-way bills and coal output indicate a pick-up in industrial activity. Government spending on infrastructure has also gathered pace. India Ratings and Research expects IIP to post a 3% growth in September.

Hasn’t IIP been declining for some time now?

Yes. IIP has contracted sequentially in four of the five months in this fiscal year so far (see chart)—a pattern, media reports say, not seen since 2016. In fact, IIP growth in the April-August period this year is 4.2% as against 6.2% in the same period last year. The election cycle, slower export growth and heavier-than-usual monsoon are the contributing factors.

Will this affect FY25 economic growth?

Only if the slowdown continues. The Reserve Bank of India expects gross domestic product (GDP) to grow 7.2% in FY25. This comes on the back of a 7% and 8.2% growth in FY23 and FY24. In the first quarter of FY25, GDP growth was 6.7%. RBI is betting on higher private consumption, thanks to better rural spending, higher credit flow from banks, elevated capacity utilization by manufacturers and continued government spending on infrastructure to drive growth. It expects exports to pick up soon.

Read more: India Inc’s increasingly important growth driver: The subsidiaries

So, will India remain in the fast growth lane?

Yes. Despite some headwinds such as a slowdown in factory output and export growth, the Indian economy remains the fastest growing among major economies. For instance, while India is projecting a GDP growth of 7.2%, China is struggling to meet its 5% target and has recently announced a series of stimulus measures to boost its sluggish economy. The US is growing at 3% and the UK at 0.5%. India’s stature as the world’s fastest growing large economy is under no immediate threat.