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Manufacturing sector starts gaining momentum

BusinessManufacturing sector starts gaining momentum

Despite sustained weakness in the manufacturing sector as reflected by the recent Index of Industrial Production (IIP) data, many economists feel that industrial activities are already underway, but are probably not adequately captured by the IIP or the basket of commodities that IIP captures has become pretty old with the base year being 2004. The disconnect between manufacturing growth (or de-growth) as depicted by the first quarter GDP data and the one reflected by the IIP, seems quite visible with the former showing a healthy manufacturing growth of about 9%, while the later continues to paint a disappointing picture of the same. The IIP for the latest month of August shows manufacturing to have contracted by (minus) 0.3%. However, the Purchasing Managers Index released by IHS Markit for September clearly points out that the “improvement in manufacturing is underway with new orders and output continuing to expand,” according to Rajiv Biswas, Asia-Pacific Chief Economist with IHS Markit.

The nature of manufacturing (with technological sophistication) is changing much faster and IIP needs to acknowledge such changes. The Central Statistical Office (CSO) is already working to make IIP look more dynamic. What supports the revival argument is the perceptible exuberance of the stock markets expecting things to be improving further in the ongoing festive months. Positive factors that are likely to support this upturn includes the impact of better monsoon which will help boost food-related processing that accounts for about 7% of total manufacturing output. India’s steel production has also shown a strong rebound in recent months, helped by anti-dumping measures imposed on imported steel products from a number of nations, including China.

What supports the revival argument is the perceptible exuberance of the stock markets expecting things to improve further.

Better farm incomes have given confidence to many interest rate sensitive sectors like auto. The key drivers of auto demand revival laid by lower inflation, cheap availability of finance, 7th Pay Commision boost and better farm profitability, are likely to continue, “with improved participation from rural segments”, according to Priyaranjan, Vice President – Auto & Auto Anc at Systematix Shares & Stocks.

There are, however, a couple of major risks which might upset the revival in manufacturing. One key risk would be if there is no upturn in the investment cycle, since that would constrain demand for capital goods. “Capital goods are currently the weakest segment of manufacturing, with total capital goods output in April to August 2016 down 21% year-on-year,” says Biswas. Another risk would be from any significant upturn in inflationary pressures, as that could force interest rates higher and further constrain any recovery in the investment cycle.

 

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