India's Industrial Production Slumps Amid Cost Pressures and Supply Hiccups

In a marked shift from earlier trends, India's Index of Industrial Production (IIP) witnessed a sharp deceleration to 2% year-on-year in March 2026. This slowdown followed a 5.2% rise in February and a 3.9% growth in March the previous year, according to a Union Bank of India report. Experts attribute this downturn to widespread weaknesses in manufacturing and energy sectors, exacerbated by soaring input costs and persistent supply chain disruptions.

The core sector, responsible for nearly 40% of the IIP, shrank by 0.4% in March, its weakest performance since 19 months. While industries such as natural gas, refinery products, steel, and cement managed to register positive year-on-year growth, others like coal, crude oil, fertilisers, and electricity faced declines. High-frequency economic indicators presented a mixed bag; E-way bill generation maintained robust double-digit growth, albeit slower than previous months, bolstered by GST adjustments and active goods movement.

Fuel consumption patterns indicated cautious consumer behavior: petrol and diesel usage rose amid fears of supply disruption due to geopolitical tensions, counterbalancing dips in aviation turbine fuel demand from reduced air travel. Meanwhile, electricity demand softened, attributed to unseasonable rainfall reducing cooling needs. Despite these challenges, sectors like automobile manufacturing demonstrated resilience, with two-wheeler and tractor production experiencing significant year-on-year hikes, buoyed by sturdy rural demand.

Notably, the merchandise trade deficit improved, shrinking to $20.67 billion in March from February's $27.10 billion, even as exports and imports contracted. Union Bank's analysis emphasized that the scaling back in industrial production is primarily linked to struggles in energy-reliant segments and manufacturing disruptions. Looking ahead, the persistence of high crude prices, potential gas supply concerns, and sluggish global demand remain downside risks. However, accelerated infrastructure project execution and robust government capital expenditure may offer a buffer against these threats.

(With inputs from agencies.)