ECOSCOPE : The Economy Observer : May'26 IIP: Manufacturing and power lead industrial growth by Motilal Oswal Financial Services Ltd
* Industrial production accelerated to 5.1% YoY in May'26 from 4.9% in Apr'26, supported by broad-based manufacturing activity and a sharp pickup in electricity generation.
* Manufacturing, accounting for over 76% of the IIP basket, grew by 5.5% YoY in May’26, with 16 out of 23 industries recording acceleration. The expansion was led by electrical equipment (+20.8%), motor vehicles (+14.5%), and basic metals (+4.6%).
* Electricity & Gas Supply emerged as the fastest-growing major sector, expanding 9.9% YoY in May’26, driven by 18.0% growth in renewable electricity generation and 8.8% growth in non-renewable electricity, reflecting robust power demand and sustained industrial activity.
* Mining remained the only weak segment, contracting 1.6% YoY in May’26, primarily due to a 6.4% decline in fuel minerals, although metallic minerals expanded by 18.3%.
* The use-based classification continued to indicate healthy investment activity. Capital goods production rose 12.9% YoY, marking another month of double-digit growth, while infrastructure & construction goods increased 5.9% YoY. However, infrastructure growth has moderated from the 11.8% average recorded during Nov'25-Feb'26, indicating a normalization after a period of exceptionally strong expansion.
* Consumption indicators remained supportive, led by urban demand. Consumer durables production expanded 7.2% YoY in May'26, supported by continued strength in discretionary spending. Consumer non-durables grew 3.6% YoY, improving from 0.2% in Apr'26. However, we remain cautious on the rural demand outlook, as the anticipated El Niño-led monsoon deficiency could weigh on kharif output, agricultural incomes, and rural purchasing power, limiting a broad-based recovery in mass consumption.
* A key structural development in this release was MoSPI's adoption of the Output Producer Price Index (Output PPI) in place of Wholesale Price Index (WPI) for deflating value-based production data. The revision affects 234 out of 463 item groups (36.0% of the IIP basket) and is expected to improve the measurement of real industrial output and enhance the quality of GDP estimation.
* Industrial production is expected to gain momentum over the coming months as geopolitical tensions in West Asia have eased significantly. The reopening of the Strait of Hormuz and the subsequent decline in crude oil prices should gradually reduce input costs and alleviate supply-side pressures, supporting manufacturing activity. However, it is likely to take a few months for shipping backlogs to clear and global supply chains to normalize fully, warranting a cautious stance on the near-term industrial outlook.
* Domestically, the uneven spatial distribution of the monsoon and significantly deficient rainfall so far, coupled with the expected impact of El Niño, pose downside risks to industrial activity. While electricity generation is likely to remain supported by elevated cooling demand during an extended summer, consumer-oriented industries, particularly those dependent on rural demand, could face headwinds as weaker agricultural output, lower farm incomes, and softer rural purchasing power weigh on consumption.
Industrial activity strengthens in May; methodological revision improves the quality of IIP estimates
India's industrial production accelerated to 5.1% YoY in May’26 from 4.9% in April, indicating that industrial activity remained resilient despite an uneven global environment. The improvement was led by a broad-based expansion in manufacturing, robust electricity generation, and continued strength in investmentlinked sectors.
Manufacturing continues to drive industrial growth
* Manufacturing, which carries over three-fourths of the weight in the IIP basket, expanded by 5.5% YoY in May’26, remaining the primary contributor to headline industrial growth. Of the 23 manufacturing industries, 16 registered positive growth, highlighting the broad-based nature of the expansion.
* The strongest contributors were motor vehicles, electrical equipment, and basic metals.
* The strongest contributors were electrical equipment (+20.8%), supported by robust production of switchgear, transformers, and UPS systems; motor vehicles (+14.5%), led by passenger vehicles, commercial vehicles, and auto components; and fabricated metal products (+15.5%).
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