The Indian economy looks set for tough times ahead

GS-III: Indian Economy | Industrial Growth | Manufacturing | Energy Security | External Sector

Context

• Core Sector Growth: Growth in India’s Index of Core Industries (ICI) slowed to 5.4% in July, from 6% in June.
• Manufacturing Weakness: The Manufacturing PMI also declined in July to its lowest level since August 2021, indicating weaker domestic demand.
• Quality of Growth: Part of the growth in core industries reflects a low-base effect, rather than strong underlying expansion.
• Economic Signal: The data point towards a combination of slackening demand, rising input costs and moderating industrial growth.

Key Trends in Core Industries

• Coal: Grew 7.6%, but largely due to a low base after a 12.3% contraction in July 2025.
• Refinery Products: Returned to 2.7% growth after three months of contraction, but again benefited from a weak base.
• Iron Ore: Recorded strong 29.5% growth, though lower than 44.5% in June.
• Steel: Growth slowed sharply to 2.9%, compared with 5.6% in June and 15.7% in July 2025.
• Crude Oil & Natural Gas: Continued to contract, indicating persistent weakness in domestic hydrocarbon production.
• Cement: Accelerated to 13.1%, reflecting stronger construction and infrastructure activity.
• Electricity: Grew 9%, although growth moderated from double-digit expansion in May and June.

Major Concerns

1. Low-Base Effect

• Headline Growth: High growth rates in coal, refinery products and iron ore partly reflect contraction in the corresponding period last year.
• Underlying Weakness: Therefore, headline ICI growth may overstate the strength of industrial recovery.
• Policy Implication: Greater focus should be placed on sequential growth and capacity utilisation, rather than year-on-year growth alone.

2. Weak Domestic Demand

• Manufacturing PMI: The decline in PMI indicates softening domestic demand conditions.
• Investment Risk: Persistent weak demand can discourage private investment and capacity expansion.
• Employment: Slower industrial activity can constrain job creation, particularly in manufacturing.

3. Dependence on Imported Energy

• Crude Oil Imports: Crude imports increased 13.3% in volume terms in July.
• LNG Imports: LNG imports increased by around 1.5%.
• Import Bill: Higher global oil prices caused the crude oil import bill to rise sharply.
• Energy Security: Weak domestic production combined with rising imports increases India’s external vulnerability.

4. Persistent Hydrocarbon Production Decline

• Crude Oil: Domestic crude production has remained under pressure.
• Natural Gas: Natural gas production has also contracted for an extended period.
• Structural Issue: This indicates inadequate domestic exploration and production despite India’s growing energy requirements.

5. Geopolitical and Trade Risks

• Russian Oil: India’s dependence on Russian crude could become more costly if proposed U.S. tariffs/sanctions affect trade.
• Export Competitiveness: Higher trade costs could increase pressure on Indian exporters.
• External Shock: Energy prices therefore represent both an inflationary and external-sector risk.

Positive Indicators

• Cement Growth: Strong 13.1% growth indicates continued infrastructure and construction activity.
• Electricity Demand: 9% electricity growth reflects continued economic activity and energy demand.
• Iron Ore: Strong growth indicates continued activity in parts of the mining and metals sector.
• Infrastructure Support: Cement and electricity performance suggests that public infrastructure spending continues to provide some support to growth.

What the Data Indicate

• Demand: Domestic demand appears to be moderating.
• Industry: Industrial growth remains positive but is losing momentum.
• Energy: India’s dependence on imported hydrocarbons remains high.
• Costs: High energy prices could increase production and transportation costs.
• Growth: The economy may face a period of slower growth with higher input costs.
• Investment: Sustained demand weakness could delay private-sector investment.

Way Forward

• Boost Domestic Demand: Strengthen consumption through employment generation and targeted income support.
• Revive Private Investment: Improve the investment climate and ensure faster project clearances and infrastructure creation.
• Manufacturing Competitiveness: Reduce logistics, energy and compliance costs to improve industrial competitiveness.
• Energy Security: Accelerate domestic exploration, renewable energy, storage and energy efficiency.
• Diversify Energy Sources: Reduce excessive dependence on imported crude through renewables, EVs, biofuels and green hydrogen.
• Deepen Manufacturing: Promote higher-value manufacturing instead of excessive dependence on commodity and primary-sector growth.
• Export Diversification: Expand markets and products to reduce vulnerability to geopolitical and tariff shocks.
• Monitor Demand Indicators: Policymakers should track PMI, capacity utilisation, private investment and consumption alongside headline ICI growth.

Conclusion

The July core-sector data present a mixed picture. While cement, electricity and iron ore provide positive signals, the slowdown in manufacturing, persistent weakness in domestic hydrocarbons and dependence on imported energy reveal deeper structural concerns.

India therefore needs to move from base-effect-driven industrial growth towards demand-led and productivity-driven expansion, supported by stronger manufacturing, private investment and energy security.

UPSC Mains Practice Question

Q. India’s recent industrial growth reflects a combination of weak domestic demand, base effects and rising energy dependence. Discuss the major challenges and suggest measures to sustain industrial growth.