LSM finds a higher base

Large-Scale Manufacturing (LSM) growth may have slowed to 3 percent YoY in July, but the headline understates the more important development.

The July LSM index climbed to 119.13, the highest reading ever recorded for the month and comfortably above the previous July peak of 115.62 in FY26. More importantly, the index now stands well above the FY22 level, suggesting that the industrial sector is no longer merely clawing back the ground lost during the prolonged downturn.

The composition, however, is shifting. Wearing apparel has emerged as the biggest contributor to cumulative LSM growth in 1MFY27, expanding 22 percent YoY. Despite carrying a weight of only around 6 percent in the LSM basket, the sector alone accounted for nearly two-thirds of the overall increase in the index. That is a sizeable contribution from a relatively small-weight sector.

The July number was helped by an unusually strong base of RMG export quantities. Exported garments reached 8.74 million dozen pieces during the month, the highest monthly quantity on record and well above the sector’s historical run rate. The momentum, however, was not sustained into August. August export quantities have since returned closer to their mean, leaving 2MFY27 RMG export quantity growth at 10.9 percent, with August itself showing virtually no YoY growth. The moderation should therefore become visible in the August LSM reading as well.

Automobiles remain the other major pillar of the recovery. The sector delivered the second-largest contribution to July LSM growth, with output up 57 percent YoY. What makes the number more meaningful is that it comes on top of strong growth in the same period last year. This is no longer simply a low-base recovery story. Production is continuing to build on an already higher base, pointing to a fairly broad-based revival in auto demand and manufacturing activity.

Petroleum products have also quietly become an important source of support. The sector has rebounded on the back of higher demand and improved domestic crude flows, but refinery throughput has been the bigger story. Local refineries have operated at considerably higher capacity levels than in recent years, with domestic production virtually meeting the country’s HSD requirement. That improvement should keep petroleum products contributing positively in the months ahead, provided refinery utilisation remains elevated.

Food, meanwhile, has moved into negative territory after providing one of the strongest boosts to LSM during the second half of FY26. That earlier surge was overwhelmingly a sugar story, with the near-record sugar season lifting the entire food group. With the sugar cycle now over, a modest correction in ghee and oil production has been enough to pull the overall food group into the red. This is less a sign of broad weakness in food manufacturing than the natural unwinding of an exceptionally strong sugar-led base.

The weaker side of the industrial picture remains relatively contained. Pharmaceuticals and chemicals are among the more prominent sectors in negative territory, while textiles, despite having the largest weight in the LSM basket, are also marginally down. Importantly, however, none of the declining sectors has posted a particularly sharp contraction. The drag is therefore limited, leaving the aggregate index relatively well supported by the sectors still expanding.

The 3 percent July growth rate is consequently less interesting than the level at which LSM is now operating. At 119.13, the July index is the highest ever recorded for the month, and well above the levels seen even during the previous industrial peak. After spending much of the past three and a half years struggling to regain lost ground, manufacturing is finally operating from a materially higher base.

The road ahead is unlikely to be entirely smooth. Domestic inflation has picked up again, while expectations of a rapid decline in interest rates have consequently been pushed back. Higher-for-longer borrowing costs could temper the pace of recovery in interest-sensitive segments, particularly construction-related industries, white goods and, to some extent, automobiles during 1HFY27.

Still, the key difference from the earlier part of the cycle is that one of the biggest structural constraints on industrial activity has eased. Industrial electricity tariffs have fallen sharply from their earlier levels and are now broadly competitive, improving the economics of running factories on the grid. That matters far more for the durability of the recovery than another month of double-digit growth in any single sector.

LSM may therefore be entering FY27 with slower headline growth, but from a much healthier starting point. The industrial economy is no longer simply trying to recover from the shock of the past few years. It has established a higher base, with several large sectors now generating genuine production momentum. The test for FY27 will be whether that momentum can spread beyond a handful of standout sectors without being derailed by renewed inflation and tighter financial conditions.