Economic activity hits 32-month high in June, says Icra; retains Q1 growth forecast at 6.4-6.6%

New Delhi: India's economic activity accelerated sharply in June, with Icra's Business Activity Monitor (BAM) hitting a 32-month high on broad-based gains across high-frequency indicators. However, the rating agency expects GDP growth to moderate to 6.4-6.6% in the first quarter of FY27, as higher energy and commodity prices weigh on corporate margins.

Icra's composite index of high-frequency indicators grew 12% year-on-year in June, up from 9.4% in May and the strongest expansion in nearly three years. The improvement was broad-based, with 13 of the 16 constituent indicators registering faster growth during the month.

The ratings agency attributed the stronger momentum to multiple factors, including the temporary ceasefire between the US and Iran, which eased disruptions to economic activity, prolonged construction and mining activity due to a 40% rainfall deficit in June, and favourable base effects across several indicators.

However, it cautioned that the renewed US-Iran conflict could reverse some of June's gains if it continues to disrupt global energy markets and supply chains. Any impact is likely to show up in the next edition of the Business Activity Monitor.

Despite the sharp pickup in activity, the rating agency maintained that GDP growth in Q1FY27 is likely to slow to 6.4-6.6% from 7.7% in the previous quarter, as higher input costs are expected to compress corporate profitability and weigh on gross value added across sectors.

"Looking ahead, the duration and intensity of the renewed conflict in West Asia and its implications on crude oil prices, will affect Indian macros. The uncertainty related to the monsoon remains another factor to watch out for. We see downside risks to our GDP growth forecast of 6.7% for FY2027,"Aditi Nayar, chief economist, ICRA Ltd said.

Among the strongest contributors to June's performance were automobile-related indicators. Passenger vehicle output expanded 17.6% year-on-year, two-wheeler production rose 28.1%, while vehicle registrations increased 23.2%.

Other indicators showing stronger growth included non-oil merchandise exports (16.5%), GST e-way bill generation (14.5%), mining output (7.7%), port cargo traffic (9.4%), petrol consumption (7.5%) and diesel consumption (6.2%). Bank deposits and non-food credit also continued to post healthy expansion.

Some indicators softened. Domestic airline passenger traffic contracted 1% year-on-year in June after growing 9.5% in May, while growth in finished steel consumption eased to 7.8% from 9.7%. Electricity generation also slowed marginally to 9.8%, though it remained robust.

Based on the government's newly revised core sector series, core industries grew 5% in June, the fastest pace in five months, supported by stronger coal, iron ore, refinery and cement output. Icra expects the Index of Industrial Production (IIP) to grow 5-6% in June compared with 5.1% in May.

On the labour front, the all-India unemployment rate remained elevated at 5.5% in June. Rural labour market conditions stabilised after deteriorating in May, although Icra cautioned that delayed kharif sowing could weigh on employment in coming months. Urban unemployment edged up to 6.6% as labour force participation improved faster than employment.

Early indicators for July present a mixed picture. Electricity demand during 1-19 July expanded 12.2% year-on-year, reflecting higher temperatures and deficient rainfall, while vehicle registrations rose only about 5%, considerably slower than June's pace of over 23%.

“The distribution of monsoon rainfall during the remainder of July and August will be crucial for improving kharif sowing, supporting agricultural output and containing food inflation,” it noted.

As of 17 July, the area sown under kharif crops was 658.19 lakh hectares, 6.04% lower than the 700.47 lakh hectares recorded a year earlier, although the gap has narrowed in recent weeks as rainfall improved and sowing gathered pace, according to agriculture ministry data released on Tuesday.