Manufacturing growth: India set to see a slowdown?

Manufacturing was the key driver of industrial growth in the first quarter of this fiscal (FY19). This sector recorded a healthy gross value added (GVA) expansion of 13.5% in year-on-year (YoY) terms in that quarter, aided by the base effect related to the transition to the goods and services tax (GST), reflecting the trend in volumes and earnings.

However, recent industrial data point to some loss in momentum for manufacturing volumes, and the outlook for the immediate term appears mixed.

Manufacturing growth as measured by the Index of Industrial Production, eased to 4.6% in August from 7% in July. This was along expected lines, given an unfavourable base effect related to the restocking that was underway in the year-ago period.

Moreover, the flooding in parts of the country such as Kerala in August, impacted consumer sentiment and thereby disrupted production schedules. The extent of the slowdown in the growth of consumer durables to 5.2% in August from 14.3% in July was especially sharp.

Subsequent data released by the Society of Indian Automobile Manufacturers has indicated that the pace of expansion of aggregate auto production rose to a healthy 8% in September from 6.8% in August. This was led by an improvement in the growth of output of motorcycles and commercial vehicles.

However, scooters and passenger vehicles (PV) recorded a mild YoY contraction in production last month. The unfavourable performance of PV in September can be attributed to higher inventory levels at dealers, following subdued demand over the past few months.

Moreover, the steep increase in prices of two-wheelers after the change in insurance guidelines for third party cover in September, in addition to some state-specific factors, curtailed demand and volumes for scooters.

Additionally, a delayed start to the festive season this year has impacted production schedules in various industries, including scooters.

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Moreover, non-oil merchandise exports recorded a base-effect led contraction (in US$ terms) in September, after having displayed robust double-digit growth in the previous four months. Key sectors recording a YoY decline in September include labour-intensive sectors such as gems and jewellery, and ready-made garments, as well as engineering goods. In addition to the volume trends, cost pressures related to the currency depreciation, higher fuel prices, and rising interest rates, would weigh upon the margins of producers. Moreover, given the waning of the favourable base effect, we expect manufacturing GVA growth to moderate to 7-8% in the second quarter of this fiscal from the high of 13.5% in the preceding quarter.

Looking ahead, the outlook for the festive season appears mixed at present. On the one hand, the recent GST rate cuts may support consumer sentiment. However, demand may be curtailed to an extent if rising cost pressures related to the aforementioned risks, are passed through by producers to final product prices. Whether the sharper depreciation of the rupee relative to some emerging market peers, positively impacts exports with a lag, remains to be seen.

The writer is principal economist with Icra

-Aditi Nayar