Manufacturing growth accelerates in India as exports and investment cycle gain momentum

India’s manufacturing sector is expected to maintain its momentum in the coming months, supported by resilient exports and a strengthening investment cycle, although weaker rural demand due to below-normal monsoon conditions could pose a challenge, according to an ICICI Bank Research report.

The report said exports are likely to remain a key source of support for manufacturing, while rising power demand is pointing to improving momentum in capital expenditure.

“While rural demand could weaken, exports should remain a bright spot thus powering manufacturing growth. Rising power demand too is positive for capex cycle when investment cycle is seen turning up,” ICICI Bank Research said.

The analysis noted that the improvement in manufacturing activity has been broad-based, reflecting stronger demand from both domestic and overseas markets.

Government-led infrastructure spending and a gradual improvement in private-sector capital expenditure have also contributed to the manufacturing momentum, the report said.

India’s industrial production growth accelerated to 8 per cent year-on-year in August, compared with 7.4 per cent in July. Manufacturing output expanded 9 per cent during the month, while electricity production also recorded strong growth. Mining, however, remained a weak spot, contracting 5.6 per cent.

Fourteen of the 23 manufacturing sectors registered growth in August, led by electrical equipment, transport equipment and motor vehicles.

Electrical equipment output surged 30.9 per cent, while other transport equipment and motor vehicles grew 25.3 per cent and 25.2 per cent, respectively. Production of computer, electronic and optical products increased 19.3 per cent.

The investment cycle also showed signs of gaining strength, with capital goods production rising 16.9 per cent in August.

Power-sector indicators provided another positive signal. Electricity generation increased 13.3 per cent, while renewable power generation rose 15.4 per cent.

However, the report flagged below-normal monsoon conditions as a potential drag on rural consumption. Higher power demand was partly attributed to the weaker monsoon, while subdued agricultural conditions could affect rural purchasing power in the months ahead.

The consumption pattern also showed some change, with consumer durables gaining stronger momentum than non-durables. This suggests that the recent improvement in consumption has been more visible in discretionary goods, the report said.

Overall, ICICI Bank Research expects exports and the investment cycle to remain important drivers of manufacturing growth, even as rural demand remains a potential area of concern.