IIP growth in August eases to 4% over manufacturing dip

India’s industrial output growth eased marginally to 4% year-on-year in August due to a slowdown in manufacturing, but economists expect production to rebound in the following months, driven by strong festive demand on the back of GST cuts. The Index of Industrial Production (IIP) had recorded a 4.3% rise in July.

Tax Relief to Aid Production
Manufacturing growth fell sharply to 3.8% YoY last month from 6% in July, offsetting gains in mining and electricity, official data released Monday showed.

“The GST rationalisation is expected to boost consumption demand during the festive season, which is likely to augur well for manufacturing output in September-October, once the older inventories are off the shelves,” said Aditi Nayar, chief economist at ICRA.

“While this may partly offset the adverse impact of the US tariffs and penalties, an unfavourable base may constrain expansion in the IIP in these months,” she added.

Manufacturing activity had recorded high growth of 4% and 4.4% in September and October 2024.
In August 2024, the IIP did not expand year on year.

Rating agency Crisil expects rising private consumption to support industrial production, with the rural economy benefiting from “copious monsoon, robust kharif sowing, and benign inflation.”

“The urban economy will get a leg-up from lower lending rates, income tax relief, and the rationalisation of the goods and services tax,” said DK Joshi, chief economist at Crisil.

The GST Council approved restructuring of the indirect tax system, effective September 22, shifting to a two-slab structure (5% and 18%) that reduced tax rates on various household items and consumer durables.

Madan Sabnavis, chief economist at Bank of Baroda, said the September IIP may be weak as consumer spending slowed ahead of the implementation of GST 2.0, with growth likely to rebound in October and November.

Average IIP growth was 2.8% in the first five months of FY26, down from 4.3% in the same period last year.

Mining boost
Mining output expanded after four months, rising 6% in August from a year earlier and reversing the 7.2% contraction in July.

Electricity generation reached a five-month high of 4.1%, up from 3.7% in July, according to the data from the Ministry of Statistics and Programme Implementation (MoSPI).

“Improvement in mining and electricity sectors supported the overall IIP growth, however, the upside was capped by a moderation in the manufacturing sector growth,” said Rajani Sinha, chief economist at CareEdge Ratings.

Within the manufacturing sector, 10 out of 23 industry groups posted positive growth in August.

In terms of use-based classification, all categories recorded an increase except consumer non-durables, which saw the steepest contraction in eight months at 6.3% last month.

Growth in consumer durables also weakened, halving to 3.5% from 7.3% in July.

“This may reflect inventory management to avoid stranded taxes ahead of the GST rationalisation,” ICRA’s Nayar said.

The construction sector component remained strong with infrastructure/construction goods recording the highest growth at 10.6% in August.