India’s Industrial Growth Slows to 4% in FY25

Context:

India’s Index of Industrial Production (IIP) averaged 4% in FY25, the lowest in the past four years, signaling a broad-based industrial slowdown amid weak consumption, muted exports, and lagging private investment.

Key Drivers of the Slowdown

• Global uncertainty dampening goods exports
• Lower-than-expected domestic demand growth
• Muted private capital expenditure, despite lower borrowing costs
• Rural consumption weakness due to food inflation and falling farm incomes

Sector-Wise IIP Performance Comparison

• Consumer Non-Durables: Sharp degrowth of -1.6% in FY25 vs. +4.1% in FY24, indicating rural consumption stress
• Consumer Durables: Growth almost doubled to 8% (FY25) from 3.6% (FY24), reflecting urban demand recovery

Monthly IIP Trend Snapshot

• March 2025 IIP: 3%, up from 2.7% in February
• Electricity output was the main contributor, growing 6.3% in March, up from 3.6% in February, due to seasonal summer demand

Inflation and Monetary Policy Effects

• Retail inflation averaged 4.6% in FY25, a six-year low, mainly due to falling vegetable prices
• But lower prices negatively impacted farm incomes, hurting rural demand
• RBI’s repo rate cut from 6.5% in January to 6% in April, lowering capex borrowing costs—but private investment sentiment remains weak

Trade and MSME Impact

• Goods exports remained flat in FY25, raising concerns for MSMEs
• MSMEs contribute 45.8% to exports, employ over 250 million, and have grown from ₹4 lakh crore (FY21) to ₹12 lakh crore (FY25)
• US-India Bilateral Trade Agreement must be shaped to support nearly 60 million MSMEs, most of which are micro enterprises

Policy Priorities Ahead

• Boost rural demand through targeted fiscal stimulus or income support
• Revise MSME export incentives, improve ease of doing business
• Ensure timely trade agreements to diversify market exposure
• Strengthen domestic demand to revive private capital expenditure

TIE