India's business activity rises to 32-month high in June; ICRA projects Q1 GDP growth at 6.4-6.6%

India's economic activity accelerated sharply in June, with the ICRA Business Activity Monitor (BAM) recording a 32-month high growth of 12% year-on-year, driven by broad-based improvement across high-frequency indicators, easing geopolitical disruptions, and weather conditions that supported construction and mining activity. The ratings agency said the stronger-than-expected performance has reinforced its projection of 6.4-6.6% GDP growth for the April-June quarter (Q1FY27). 

The BAM, which tracks 16 high-frequency indicators of economic activity, expanded from 9.4% in May, with 13 of its 16 constituent indicators posting faster year-on-year growth during June. According to ICRA, the improvement reflected the temporary ceasefire between the US and Iran, which reduced disruptions to domestic economic activity, along with a 40% rainfall deficit in June, the sharpest in 12 years, which extended the construction and mining season. A favourable base effect also contributed to the higher growth. 

The report noted a notable improvement in industrial activity. Under the newly revised Index of Core Industries with 2022-23 as the base year, core sector output expanded 5% year-on-year in June, the fastest pace in five months, up from 3.2% in May. The revised series now includes iron ore as the ninth core industry and assigns the core sector a weight of 32.9% in the new Index of Industrial Production (IIP), compared with 40.3% under the earlier series. Growth was primarily driven by higher output in coal, iron ore, cement and refinery products, supported by lower rainfall that benefited mining and construction activities. Based on this performance, ICRA expects industrial production to grow 5-6% in June, marginally higher than 5.1% recorded in May. 

High-frequency indicators pointed to a broad-based recovery across several sectors. Passenger vehicle production accelerated to 17.6% year-on-year from 10.9% in May, while two-wheeler output surged 28.1%, compared with 12.7% in the previous month. Vehicle registrations also strengthened sharply, rising 23.2% after growing 11.2% in May. Non-oil merchandise exports expanded 16.5%, ports cargo traffic grew 9.4%, and GST e-way bill generation increased 14.5%, all showing faster growth than in the previous month. Fuel consumption also improved, with petrol demand rising 7.5% and diesel consumption increasing 6.2%, despite higher retail fuel prices. Bank deposits and non-food credit also recorded stronger year-on-year growth. 

Some indicators, however, moderated during the month. Domestic air passenger traffic contracted 1% after expanding 9.5% in May, while growth in electricity generation and finished steel consumption eased, although both continued to post healthy expansion. 

For the April-June quarter as a whole, the ICRA Business Activity Monitor grew 10% year-on-year, marking its strongest quarterly expansion in ten quarters, compared with 9.1% in Q4 FY26. The improvement was led by stronger performance in automobile production, mining, electricity generation, non-oil exports, ports cargo traffic, cement production, domestic airline traffic and non-food bank credit. Nevertheless, ICRA cautioned that robust volume growth may not fully translate into higher GDP growth because rising input costs are expected to squeeze profitability across sectors. 

Labour market indicators presented a mixed picture. The all-India unemployment rate remained elevated at 5.5% in June. Rural labour market conditions stabilised, with the labour force participation rate and worker population ratio unchanged at 56.6% and 53.8%, respectively, while the rural unemployment rate eased marginally to 5% from 5.1%. In urban areas, however, unemployment edged up to 6.6% from 6.4%, reflecting a faster increase in labour force participation than employment. ICRA warned that rural employment conditions could weaken further if kharif sowing remains sluggish. 

Early data for July indicate mixed trends. Electricity demand rose 12.2% year-on-year during July 1-19, higher than 10.9% in June, supported by above-normal temperatures and continued rainfall deficiency. In contrast, vehicle registrations grew only 5% during the period, significantly slower than the 23.2% increase recorded in June, suggesting moderation in consumer demand. 

The report also highlighted that although southwest monsoon activity improved during July after a delayed onset, rainfall distribution remains uneven. Cumulative kharif sowing had narrowed its year-on-year decline to 6% as of July 17, compared with 16% a week earlier, but ICRA said adequate rainfall during the remainder of July and August will be crucial to support agricultural output and keep food inflation under control.