​Calm before the storm: On the economy, impact of U.S. tariffs

The four-month high July growth rate of 3.5% in the monthly goods output barometer, the Index of Industrial Production, must have come as a relief a day after India’s largest trading partner, the United States, operationalised its punishing “penalty” tariffs of 25% ostensibly for New Delhi’s continued oil purchases from Russia. While this July’s 3.5% is lower than last July’s 5%, a broad-based growth in manufacturing aided by year-on-year (y/y) expansions in capital (5%) intermediate (5.8%) and infrastructure goods (11.9%), suggests that recovery continues to be led by considerable capex spends driven by the government. This is evident from the impressive growth in basic metals (12.7% y/y), electrical equipment (+15.9% y/y), and other non-metallic minerals (led by cement; 9.5% y/y).

What must also come as a relief is the first green shoots of rural demand recovery as both consumer durables (7.7%) and non-durables (0.5%) were positive for the first time in nine months, on the back of a retail inflation of 1.55% aided by a second consecutive month of food price disinflation of – 0.8%, lower than -0.2% in June and 5.1% in July 2024. It is noteworthy that consumer non-durables — food staples and household essentials — have been positive only in four out of the past 12 months, and have consecutively remained negative from December last year till this August in the face of runaway consumer food price inflation that peaked between last September and January this year. While mining activity has contracted for the fourth consecutive month this year, July’s -7.2% was a tad better than June’s -8.7%, but much worse than last July’s 3.8%. The recovery from the massive flooding of coal mines across the mining States of Jharkhand, West Bengal, Odisha and Chhattisgarh could be a protracted process, the effects of which would be felt for months. The electricity output in July (0.6%) was marginally better than June (-1.2%), but was much worse that last July’s 7.9%. But these numbers may well be the calm before the storm. Tariff-impacted sectors such as textiles (-1.4%), apparels (3.2%), and leather (-3%) have already begun exhibiting signs of stress. The fact that these sectors are labour intensive and heavily dominated by India’s MSME sector makes the strain on the economy more acute. While the Centre has promised to address the near-term liquidity concerns of these sectors, the more human fallout of the highly probable large-scale job losses must be addressed if the gains from the historic easing in retail inflation for nine consecutive months are to be leveraged in a sustained manner to maintain, if not expand, consumption demand, and support India’s rural economy.