Demand distress: on slowdown in the overall IIP

The Hindu

4 days ago

The new financial year has gotten off to a relatively poor start when it comes to industrial production. Growth in the Index of Industrial Production slumped to a nine-month low of 1.2% in May 2025. This follows an eight-month low of 2.6% in April. Taken together, this puts the average growth in the index so far in 2025-26 at just 1.9%, down from the 5.7% average in 2024-25. A major reason behind the dip in May's industrial performance was due to the electricity sector, which contracted 5.8%, its worst performance since June 2020, nearly five years ago. This poor performance in electricity generation can be put down to an unusually cool May, but it could also point towards lower offtake for industrial purposes. The fact also remains that the slowdown in the overall IIP has been broad-based — several key sectors have either contracted or slowed sharply. The manufacturing sector slowed to a growth of 2.6% in May, down from 5.1% in May last year. A deeper look shows that this slowdown was driven by contractions in the manufacture of textiles, leather products, chemicals, pharmaceuticals, electronics, and furniture. While some of these are core sectors, most are consumer-facing, implying that demand in the economy is not picking up, and may even be slackening further. This is backed by the fact that the consumer durables and nondurables sectors simultaneously contracted for the first time since November 2023.
A sub-sector analysis of this data further reinforces the takeaway that demand is weak. Within consumer durables, the IIP data showed significant contractions in the production of footwear, books, plastic furniture, shaving razors, stainless steel utensils, computers, phones, air-conditioners and coolers. These are all items of discretionary spending, not strictly essential, which implies that people are holding off on their purchases. Even among consumer non-durables, the items that have seen contractions — such as meat, honey, fruit juice, jams, sugar and bottled water — are those that are eschewed the quickest during lean periods. The situation does not seem to have improved much in June either. The private sector manufacturing Purchasing Managers Index report, released on Tuesday, shows that while demand for intermediate goods is doing well, the same cannot be said for either capital or consumer goods. In recent interviews, Finance Minister Nirmala Sitharaman has expressed confidence that urban demand is recovering and that Budget 2025's tax breaks will boost demand by the time the festival season rolls around. The progress of the monsoon so far indicates that rural demand may indeed pick up by then, but urban demand remains a worry. With trade remaining subdued and uncertain, domestic demand weakness does not augur well for the economy in 2025-26.