India’s manufacturing sector is expected to see a significant moderation in growth during the first quarter of FY27, with manufacturing Gross Value Added (GVA) growth projected to slow to around 6 per cent, its weakest pace in nearly two years, according to ICRA.
The rating agency estimates that manufacturing GVA growth will decline from 7.3 per cent in Q4 FY26 to around 6 per cent in Q1 FY27, making it the lowest growth recorded since Q2 FY25.
Higher Input Costs Weigh on Manufacturing Profits
The slowdown comes despite an improvement in manufacturing production volumes during the quarter. Manufacturing volume growth accelerated to 6.3 per cent in Q1 FY27 from 4.7 per cent in Q4 FY26, marking the fastest pace in six quarters. However, part of this improvement was supported by a favourable base effect.
Higher production volumes did not translate into stronger profitability. ICRA’s analysis of the quarterly financial results of 978 manufacturing companies found that while aggregate sales growth improved during Q1 FY27, aggregate profits contracted after expanding in the previous quarter.
The agency attributed the decline largely to the surge in raw material costs triggered by the West Asia crisis, which particularly affected oil refining companies.
“However, their aggregate profits contracted in Q1 2026-27 following the expansion in Q4 2025-26, as the West Asia crisis-led surge in raw material costs resulted in losses for the oil refining companies,” ICRA said.
Chemicals and Metals Face Pressure
The impact of higher costs and geopolitical tensions was visible across several manufacturing segments. Basic metals, coke and refined petroleum products, and chemicals and chemical products recorded deterioration in their year-on-year performance during Q1 FY27, with ICRA noting that these segments were partly affected by the tensions in West Asia.
However, several other manufacturing segments performed better. Computer, electronic and optical products, electrical equipment, machinery and equipment, and motor vehicles, trailers and semi-trailers recorded healthy improvements in their growth rates during the quarter.
The automobile segment benefited from continued demand momentum following GST rate rationalisation, according to ICRA.
Industrial GVA Growth Could Improve
Despite the weakness in manufacturing, the broader industrial sector is expected to perform better. ICRA estimates industrial GVA growth at 7.7 per cent in Q1 FY27, compared with 7.3 per cent in Q4 FY26.
The improvement is expected to be driven by all major industrial sub-sectors except manufacturing. Electricity generation was a particularly strong contributor, with growth accelerating to a nine-quarter high of 9.3 per cent year-on-year in Q1 FY27, compared with just 2.7 per cent in the previous quarter.
Power Demand Gets a Boost From Heat
The sharp increase in electricity generation was partly attributed to a favourable base and the delayed arrival of the Southwest Monsoon across several regions.
The delayed monsoon prolonged elevated temperatures, increasing cooling requirements and consequently boosting electricity consumption. This helped electricity generation record its strongest growth in nine quarters despite the broader moderation in manufacturing activity.
GDP Growth Seen Easing to 7%
At the economy-wide level, ICRA expects India’s real GDP growth to have moderated to 7 per cent in Q1 FY27, compared with 7.8 per cent in Q4 FY26.
The manufacturing slowdown therefore emerges as an important drag on overall economic momentum, even as stronger electricity generation and selected manufacturing segments provide some support.
The Q1 FY27 picture points to a mixed industrial environment, with production volumes holding up relatively well but higher input costs, particularly those linked to geopolitical tensions and the West Asia crisis, putting pressure on manufacturing profitability.
