Manufacturing back in business, shrugs off GST, demonetisation blues

Stunning. That was the only word to describe the number flashing on television screens on the evening of August 31 this year. The first-quarter GDP numbers had just been released and growth had slipped to 5.7%, a three-year low.

While that in itself was shocking, what was even more stupefying was the collapse of manufacturing. Quarterly gross value added (GVA) growth for the sector slipped to 1.2% compared with 10.7% in the previous year. 1.2%!, that’s it.

Private sector growth, deduced from the data available from listed companies on the stock exchanges was even more stunning.

A negative 0.9% compared with a 10.2% growth in year-ago period! It took some time for the numbers to sink in. But when it did, the full extent of the problems in manufacturing induced by GST rollout became apparent. Businesses had stopped or sharply cut back production of goods in May-June ahead of the GST rollout on July 1. Small businesses still facing demonetisation after-effects suffered even more and that was fully reflected in the data captured by government’s statisticians.

Cut to November and the picture has changed. On Thursday, the second quarter GDP estimates were released showing a smart bounce in GDP and manufacturing. GVA for manufacturing rose 7% in the quarter compared with 1.2% in April-June, while private sector corporate growth was a healthy 11.4%. Of course, the numbers were still lower than 7.7% manufacturing growth in second-quarter of 2016/17 when the economy was humming along before the demonetisation shock in November last year. So there is a lot of room to do more. This is obviously not the best performance and one should refrain from celebrating too much or calling this a spectacular turnaround. But there is no doubt that the woes caused by GST and demonetisation, at least for big and medium manufacturers, have ebbed and that they are on the cusp of faster growth.

Consider the following: GVA for mining and quarrying grew 5.5%, the highest growth rate the sector has posted in the first-half of the fiscal year since 2015/16. Electricity, gas water supply and utilities recorded a growth of 7.6% in GVA compared with 5.1% in the year-ago quarter.

The star performer here was electricity which grew by 6.1% in July-September compared with 3.1% last year.

Commercial vehicle sales jumped 21% in the second-quarter, while cargo handled by civil aviation grew by 18.9%; railway freight growth measured by net tonne kilometres was up 5.0%. Construction has been having a bad time but second-quarter numbers show that it has actually held up quite well. Now, construction here covers cement production, consumption of finished steel. These haven’t grown as much as the previous year but the category has grown 2.6%, which is up from 2.0% growth in the first-quarter.

An interesting anomaly needs to be mentioned here and that is the discrepancy between the cement production data and the actual volume growth reported by major cement companies in the three-months ended September 30.

Almost all the big cement firms reported double-digit volume growth in the second-quarter with ACC and UltraTech volumes rising 18% followed by Gujarat Ambuja’s 12% growth. Smaller JK Lakshmi Cement too reported 10% volume growth. New capacities through mergers helped support this growth but still this is surprising as the second-quarter is generally weak for cement companies due to monsoon and dull construction activity across the country. So one shouldn’t read too much into the dip in cement production and I think a fuller analysis is needed to understand the demand conditions for cement companies.

On Thursday, we had another interesting data release and that was the performance of core industries. The eight core industries, that is cement, steel, fertiliser, natural gas, crude oil, refinery products, coal and electricity grew by 4.7%, compared with 7.1% last year. The figure was the same as previous month and the joint highest growth for this fiscal year. Once again, it shows a revival in manufacturing led by steel, refinery products, coal and electricity.