IIP growth weakens for the second consecutive month

Growth in the Index of Industrial Production (IIP) softened to 1.2% on-year in May from 2.6% in April, the lowest since August 2024, impacted by a contraction in the electricity sector and softer growth in manufacturing.

Contraction in the consumer-oriented and electricity sectors resulted in the slowdown in IIP growth. Export-oriented sectors displayed a mixed performance. However, pharmaceuticals, chemicals and textiles showed a decline in output on-year. However, investment-related goods experinced a more positive growth trend.

External risks to growth from the US tariffs remain high in fiscal 2026. For now, the US administration has paused the hike in reciprocal tariffs, though a 10% increase in universal tariff, along with that on the auto, steel and aluminium sectors is in place. That said, the announced reciprocal tariffs are expected to come into effect from July 9.The tariff hikes are likely to hit goods exports in fiscal 2026, while private investments may be impacted by global uncertainty. S&P Global expects global growth to slow to 2.9% in 2025 from 3.3% in 2024.

We expect consumption to improve owing to:

• The southwest monsoon is expected to support agricultural production, with the India Meteorological Department forecasting an above-normal monsoon for fiscal 2026 (106% of long-period average), which augurs well for agricultural production. This is also expected to ease food inflation from 2024, which will aid discretionary spending. As on June 30, all-India rainfall stands at 109% of the long-period average
• Rate cuts by the Reserve Bank of India’s Monetary Policy Committee (MPC) are expected to support domestic demand. The MPC has already cut rates by 100 basis points in the ongoing easing cycle and bank lending rates have begun to soften. We expect another rate cut in fiscal 2026
• Income tax cuts and expected spending on rural support schemes as announced in the budget for fiscal 2026 too will support private consumption

Net-net we expect gross domestic product (GDP) growth at 6.5% in fiscal 2026, with risks tilted to the downside.