Factory floors find their footing again

A broad-based industrial recovery led by high-value-added sectors, such as electronics and automobiles, will help sustain India's economic momentum in an uncertain global environment. IIP growth in June spurted to 7.3% from 5% in May, principally because of a sharp improvement in manufacturing, which posted 7.8% growth against 5.2% in the previous month. Easing tension in West Asia contributed to the strong performance in June, aided by the base effect. The performance may weaken going forward as the base effect turns adverse and the revival of conflict with Iran could make inflation more volatile. Yet, the strong showing in capital goods during the quarter indicates an uptick in investment interest. This is also borne out by the rise in industrial credit.

India's factory output is adjusting structurally to policy reforms, infrastructure growth and rising domestic demand. The economy is benefiting from its bigger role in global supply chains as well as manufacturing trends that favour domestic capacity building. India needs to increase the share of manufacturing in GDP, which has remained steady for some time. The policy and infrastructure push needed to do so cannot afford to flag. The global capex cycle is being driven by investments in manufacturing, infrastructure and energy. India is well-placed to capitalise on manufacturing exports and onshoring.

Industrial expansion worldwide should help India secure its place in global manufacturing. This sector could be at a turning point, and the extra growth in factory output could provide a boost to economic performance over the medium term. Subsiding concerns over energy supply may create extra headroom for growth. But challenges to Indian manufacturing remain in the form of incomplete or delayed policy reforms and insufficient integration with global supply chains. Industry needs to come out of the shadow of services in India to be able to meaningfully drive economic growth and employment. High-frequency indicators may be suggesting a reset in Indian factories.