Missing the Target

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Context

India’s Index of Industrial Production (IIP) growth fell to a six-month low of 2.9% in February 2025, down from 5.2% in January and 5.6% in February 2024, raising concerns over industrial slowdown and its impact on the 6.5% GDP growth target.

Sectoral Performance Overview

Manufacturing Sector Slowdown: Manufacturing, with a 77% IIP weightage, grew only 9% in February, down from 4.9% last year, reflecting weak sectoral momentum.
Mining Sector Contraction: Mining output declined sharply to 6%, compared to 8.1% growth in February 2024, indicating falling core sector productivity.
Power Sector Marginal Rise: Electricity generation rose slightly to 6% from 3.4% in January, but remained lower than 7.6% a year earlier.

Consumption and Demand Trends

Consumer Durables Weakening: Output growth fell to 8%, significantly below 12.6% last February, showing weakening demand for high-value goods.
Consumer Non-Durables Contraction: Output shrank by 1%, third consecutive month of decline, following 3.2% contraction in January, indicating poor essential goods demand.
Falling Inflation Not Translating to Demand Boost: Despite retail inflation falling to 61% and food inflation to 3.75%, consumption demand remained subdued.

Investment and Macro-Financial Trends

Capital Goods Growth: Capital goods output rose to 2% from 1.7% last year, signalling continued investment momentum supported by public spending.
Banking System Liquidity Squeeze: Liquidity shortfall of Rs 1.7 trillion due to foreign capital outflows prompted RBI to inject Rs 2.18 trillion via rupee-dollar swaps.
Positive Manufacturing Sub-Sectors: 14 out of 23 industry groups showed growth, led by motor vehicles (8.9%), non-metallic mineral products (8%), and basic metals (5.8%).

Practice Question

India’s industrial slowdown amid low inflation and capital investment growth reveals structural imbalances in the post-pandemic recovery. Examine the nature of these imbalances and suggest policy interventions to restore broad-based industrial growth.

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