Manufacturing activity pushes up GDP growth

Investments grow by 4.7% in Q2

Manufacturing activity in India rebounded in the second quarter (Q2) of FY18, as companies ramped up production to meet the festive demand, pushing up overall economic growth. Investment activity also witnessed an uptick after lackluster performance in the last two quarters.

Over the last two quarters, economic growth in India had slowed down, as the economy dealt with the twin shocks of demonetisation and the goods and services tax (GST). But gross value added (GVA) rebounded in Q2 FY18, growing by 6.1 per cent, up from 5.6 per cent in Q1.

Core GVA, which excludes agriculture and government spending, grew by 6.8 per cent — up from 5.5 per cent in Q1, as government spending slowed down sharply. It had dipped to a low of 3.8 per cent in Q4 FY17.

This rebound in growth is driven by the manufacturing sector. The sector grew by 7 per cent in Q2, adding 1.28 percentage points to growth. In the previous quarter, manufacturing value added had grown by a mere 1.2 per cent as companies cut back on production and destocked inventory to prepare for the GST regime.

But that affect now appears to have reversed.

“In the first quarter, companies cut down on inventories and therefore the production numbers in that quarter came down. In the second quarter, because of the expectation of festive demand, production levels have gone up and no inventory was used, which would normally have been the case. Therefore, the case of the number going up. If this view is right, that sales have been made from new production, one can expect growth numbers to be maintained or accelerate in the coming quarters as companies need to rebuild inventory,” said Madan Sabnavis, chief economist, Care Ratings. Others concurred. “There has been a higher off-take in the months of August and September, especially for the consumer-facing industries like automobiles had a good output. Manufacturing activity is reaching a level of normalcy, post GST impact, some issues have been resolved, some are in the process. The growth rate will continue. However, one should see the growth rate for the entire first half of the financial year, not just the second quarter. There was a postponement in consumer demand in the first quarter,” said M S Unnikrishnan, managing director and chief executive officer, Thermax.

But experts aren’t sure whether this uptick is sustainable.

“The impact of the adjustment to GST on output may not have completely dissipated in some sectors. For instance, anecdotal evidence suggests that the working capital cycles of exporters remain elongated. Moreover, smaller businesses appear to not have fully adjusted to the procedures of the new system,” says Aditi Nayar, principal economist at ICRA.

On the expenditure side, notwithstanding limitations, the data shows that both private and government spending has slowed down.

Private consumption expenditure recorded it slowest growth in the last eight quarters, growing at 6.5 per cent in Q2. A similar slowdown was seen in government spending which grew at a mere 4.1 per cent in Q2, down from 17.2 per cent in Q1.

“Consumption growth eased mildly on a sequential basis, albeit to a multi-quarter low in Q2 FY2018. The surge in consumption post demonetisation and pre GST, may have led to some fatigue in demand, even as overall income levels and sentiments remain healthy,” said Nayar.

But slower consumption growth was offset by higher investment activity. Gross fixed capital formation, which connotes investments, grew by 4.7 per cent in the second quarter, adding 1.3 percentage points to growth. This is the fastest growth in the last five quarters

The uptick, while surprising given the slowdown in general government spending, appears to mirror the upturn seen in the capital goods segment of the index of industrial production (IIP). The segment had grown by 3.7 per cent in Q2, after contracting by 4.2 per cent in the first quarter.