Industrial Surge: India's industrial activity witnessed a significant upswing, with the Index of Industrial Production (IIP) expanding by 5.9% year-on-year in May 2024, marking a seven-month high. This growth was driven by a notable increase in electricity production, spurred by excessive heat, and a robust performance in the manufacturing sector.
Seventeen out of 23 industries within manufacturing reported positive growth, with consumer durables and primary goods leading the charge. However, capital-intensive segments such as construction goods and capital goods showed some moderation. Both the manufacturing and services PMI rose to 58.3 and 60.5 respectively in May 2024, indicating strong expansion and outperforming global counterparts.
Trade Deficit Narrows: India’s merchandise trade deficit narrowed to $20.9 billion in June 2024, down from $22.3 billion in May 2024. This improvement was primarily due to a sharper decline in imports compared to exports. Merchandise exports hit a seven-month low of $35.2 billion, largely due to a significant drop in petroleum exports. Imports increased moderately to $56.2 billion, with a 5% year-on-year growth.
While oil imports saw gains, they were partially offset by a decline in gold and non-oil, non-gold imports. The overall trade deficit widened by 14.2% year-on-year to around $8 billion in June, driven by sluggish merchandise export growth and increased services payments, the latter reaching a nearly 13-year high. Despite these challenges, India's current account remains stable, bolstered by foreign exchange reserves of $652 billion.
Inflation Concerns: Retail inflation rose to 5.1% and wholesale inflation to 3.4% in June 2024, both reaching multi-month highs. This surge was primarily driven by escalating food prices, particularly vegetables, cereals, and pulses, exacerbated by heatwave conditions and a deficient monsoon. Food inflation is expected to remain a near-term challenge, with prices for tomatoes, onions, and potatoes continuing to rise in July.
On a brighter note, core inflation dropped to 3.1% year-on-year, the lowest in the current series, as miscellaneous category sub-components saw multi-year low inflation rates. Despite expectations of headline inflation staying above 4% in the coming months, a slight softening is anticipated in the second quarter of FY25. Given this scenario and a resilient growth outlook, the Reserve Bank of India’s Monetary Policy Committee is likely to maintain its current interest rates.
Fiscal Deficit: The fiscal deficit for the first two months of FY25 fell to 3.1% of the budgeted estimate, the lowest level in 29 years, compared to 11.8% during the same period last year. This reduction was driven by a substantial surplus transfer from the RBI and robust collections from personal income taxes and GST. Total expenditure remained stable at INR 6.2 lakh crore, with a steady 4.7% year-on-year growth in revenue expenditure offset by a 14.4% decline in capital expenditure.
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