Will India's Industrial Production Growth Sustain its Strong Revival in the Post-Pandemic Era?

India's industrial sector experienced significant growth in May 2023, according to data released by the Ministry of Statistics and Programme Implementation. The index of industrial production (IIP) expanded by 5.2%, surpassing the growth rate of 4.2% recorded in April. This positive trend suggests a robust revival of the Indian economy post-pandemic.

Manufacturing Sector Drives Growth

The manufacturing sector, a key contributor to the IIP, displayed promising growth in May 2023. It recorded a growth rate of 5.7%, up from 4.9% in April. This expansion highlights the resilience and strength of the sector, which continues to propel industrial production growth in the country.

A significant factor contributing to India's overall industrial production growth is the core sector, which represents over 40% of the IIP. In May 2023, the core sector witnessed a remarkable jump of 18.1% compared to the same period the previous year. This growth rate surpassed the 8.4% expansion recorded in April. Key industries such as cement, coal, fertilizers, and electricity played a vital role in driving this surge.

The 5.2% growth in industrial production can be attributed to robust performances in the capital goods and consumer durables sectors. This positive trend indicates a healthy investment cycle within the economy, signaling increased business confidence and consumer spending. The growth in these sectors reflects the expansion of manufacturing activities and a rise in consumer demand.

Experts' Insights on Industrial Production Growth

Over the past few months, the output of infrastructure and construction goods has demonstrated continuous growth, signaling an expanding infrastructure and real estate sector in India. The government's emphasis on infrastructure development, coupled with a growing demand for real estate, is expected to further strengthen this segment.

Vivek Rathi, Director of Research at Knight Frank India, commented on the impressive growth in industrial production: "5.2% growth in industrial production was supported by growth in capital goods and consumer durables in May 2023, indicating a healthy investment cycle in the economy. Average industrial production growth in the last one year has surpassed the pre-pandemic average growth, thus hinting at a stronger revival in the Indian economy post-pandemic. The infrastructure and construction goods output has continuously grown in the last few months, reflecting an expanding infra and real estate sector in the country. The infra push by the government along with the growing demand for real estate in India will further boost the segment."

Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, is quoted by the Mint: "The IIP growth rose to a three-month high of 5.2% in May 2023, in line with our expectations, led by all the use-based industries except consumer non-durables and infra/construction goods. The YoY performance of several high-frequency indicators related to freight and traffic movement deteriorated in June 2023 relative to May 2023, such as the generation of GST e-way bills, cargo traffic at major ports, rail freight traffic, petrol and diesel sales, PV and 2W production, as well as vehicle registrations. However, the YoY growth in electricity generation, output of Coal India Limited, and finished steel consumption improved in June 2023 relative to the previous month. Based on these trends, ICRA expects the YoY IIP growth to moderate to around 3-4% in June 2023."

Inflation Remains Within Tolerance Band

While industrial production demonstrates positive growth, inflation remains a crucial aspect to monitor. The Consumer Price Index (CPI) inflation for June 2023 was recorded at 4.81%, surpassing estimations. However, it still fell within the Reserve Bank of India's (RBI) tolerance band of 2% to 6%. Notably, this marks the fourth consecutive month in which inflation figures have remained within the RBI's target range. The Consumer Food Price Index (CFPI) witnessed a significant increase to 4.4% in June 2023 from 2.9% in May, indicating rising food prices.