Crisil Economy First Cut: IIP picks up, again

Growth in the Index of Industrial Production (IIP) accelerated for the second straight month to a 26-month high of 7.8% on-year in December, compared with an upwardly revised 7.2% in November, driven by robust consumer demand. Domestic consumption benefitted from Goods and Services Tax (GST) rationalisation, while export-oriented sectors took a hit from United States (US) tariffs.

Within manufacturing, GST rationalisation benefited sectors such as food products and automobiles, but export-oriented sectors such as wearing apparel, textiles saw IIP growth moderate.

IIP growth rose to 5.2% in the December quarter from 4.3% in the previous quarter, led by consumer durables (7.4% vs 6.9%), consumer non-durables (3.7% vs -2.1%) and capital goods (6.8% vs 5.5%). IIP growth has been particularly strong in November and December at 7.5% on average.

Looking ahead, domestic macro tailwinds should continue to support demand in consumer segments for few more quarters. However, the adverse impact of higher US tariffs on export segments may become more pronounced. A trade deal with the US that allows for an immediate reduction in tariffs closer to levels imposed on peers could help matters. We expect India’s gross domestic product (GDP) growth to moderate to 6.7% next fiscal from the National Statistics Office’s first advance estimate of 7.4% for this fiscal, weighed down by a challenging trade environment and the waning benefits from statistical factors, such as a low deflator.