Why manufacturing sector contracted in second quarter GDP? Experts explain reasons

GDP: India's Gross Domestic Product (GDP) was at 6.3 per cent for the second quarter (July-September) which was higher than most of the estimates, but the steep contraction in the manufacturing segment came as a surprise. 

According to analysts the contraction was due to high input cost which built a pressure on the manufacturing.

“GDP data has lagged behind IIP mfg data. One of the reasons is because of high input costs, companies’ margins are under pressure in the manufacturing sector and that has reflected in the weak GDP number,” said Prasanna, Head of Research, ICICI Securities PD.

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"Industrial output contracted by 0.8% in Q2 FY23 on a y-o-y basis compared with a growth of 7 per cent a year ago. This was mainly because of the poor performance by the manufacturing sector which has been marred by high input costs," said Rajani Sinha, Chief Economist, Care Edge.

Recovery is expected by the analysts in the coming quarters.

"The margins should start improving, as globally commodities prices have come down from their high. If we look at Wholesale Price Index (WPI) and Producer Price Index (PPI) inflation numbers, inflation seems to have peaked out in many countries. Thus, GDP manufacturing should start improving," said Prasanna.

"We can expect the sector to fare well in coming quarters due to festive push and easing of commodity prices," said Sinha.

Taking the global scenario into consideration, analysts predict that the manufacturing segment can see a slow down. 

"Global demand is slowing down so that will be a headwind for manufacturing exports and output," said Prasanna.

A report by stock broking firm, Smifs Limited, said that they see signs of strength in services, but expect manufacturing and exports to slow in coming months.

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