India’s Industrial Performance Remains Resilient

For a year that started with the impact of demonetization still being felt and the Goods and Services Tax (GST) – the biggest indirect tax reform in India’s independent history –  being introduced in the second quarter, the index of industrial production (IIP) has fared quite well. Comprising of manufacturing, mining and electricity production, the IIP over April-March 2017-18 subsided only marginally to 4.3% growth from 4.6% in 2016-17.

In the manufacturing segment, which accounts for the largest weight in the IIP, growth actually edged up to 4.5% from 4.4% the previous year, a commendable performance. The mining sector decelerated from 5.3% to 2.3% and the electricity segment grew by 5.4% as compared to 5.8%.

Industrial Growth

                                                                                                Source: Ministry of Statistics and Program Implementation

The year 2017-18 experienced various positives while also being hit by several shocks. The good news came from the strengthening of demand in the rural sector in the second half of the year, which boosted sales growth of fast moving consumer goods, vehicles, and food products. A firmer global economy helped Indian exports to accelerate, ending the year at over $300 billion after two years of depressed revenues.

On the other hand, GST led to hedging by manufacturers in terms of stock-piling and lower sales in a wait-and-watch mode. Factories down the supply chain huddled down to smoothly manage the shift to the new system of online invoice matching and input tax credit. With constant monitoring and tweaking, streamlining of the system was in place towards the end of the third quarter. The other negative for the sector was rise in oil prices.

While the IIP remained subdued in June and July 2017, it crossed 8.5% in November and remained over 7% for the next three months. A dip in March to 4.4% led to the second half of the year ending at just over 6.1% compared to 2.6% in the first half, a substantial gain.

Month-wise Growth Rate for 2017-18

Source: Ministry of Statistics and Program Implementation

In terms of use-based index, the fastest growth was in the consumer non-durables segment which crossed the double-digit mark for the year. While there was a welcome uptick in capital goods production and infrastructure and construction items, a slide in growth for primary goods, intermediate goods and consumer durables during the year was a concern.

Use-Based Growth in 2017-18

Source: Ministry of Statistics and Program Implementation

These trends reveal that investment activity is strengthening although at a relatively slow pace, and that consumers are still not yet confident enough to start purchasing expensive durable items.

It is notable that public spending has been robust over the last two years, with double digit growth rates as per the second advance estimates of national income. With increased infrastructure construction by the Government, capital goods have accelerated. However, offtake of primary and intermediate goods has not maintained its pace and would depend on new investments in these sectors.

Specific products at the 2-digit level for the 22 sectors reflect the broader trends in April-March 2017-18. Half the sub-sectors contracted over the year, ranging from -17.9% for tobacco products and -14.9% for other manufacturing to -0.3% for chemicals and -0.8% for beverages.

The contractions of -12.6% for electrical equipment and -11% for apparel are not good signs as the former reflects depth of advanced manufacturing and the latter represents a labour-intensive product group. Other labour-intensive segments such as textiles and wood products also recorded negative growth for the year.

On the positive side, sharp growth rates were registered in the pharma sector and the computer and electronics sector. These are both knowledge-intensive and skill-intensive sectors, and demonstrate India’s growing prowess in advanced manufacturing.

The sectors of vehicles, transport equipment and furniture too displayed strong double-digit growth rates. These also require relatively higher infusion of technology and skills, and it is encouraging to note their robust performance over the year. The notable expansion in food products and machinery points towards better demand conditions for consumers as well as industry.

Overall, the general IIP at 4.3% growth for the year indicates a resilient industry sector that is set to grow at a faster pace in the current financial year of 2018-19. CII has projected a growth rate of 7.2 – 7.5%, based on stronger manufacturing sector growth as a result of better demand conditions, both domestically and externally.

Attaining this higher growth rate for the current financial year will be boosted by the ongoing intensive reform agenda. With stable and facilitative policies, continued strong action on ease of doing business, emphasis on public infrastructure spending and stabilization of the GST, the outlook for the industry sector remains positive.

 

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