The government’s provisional GDP estimates for 2014-15, released last Friday, show India’s manufacturing sector to have notched up a healthy 7.1 per cent per cent annual growth for the fiscal, and a heady 8.4 per cent in the last quarter. This is against the corresponding year-on-year growth rates of 5.3 per cent for 2013-14 and 4.4 per cent in January-March 2014.
What is striking about these numbers is their variance with the data on the index of industrial production (IIP), also released by the same body, i.e. the Central Statistics Office. These estimates put the manufacturing growth for 2014-15 at a tepid 2.3 per cent (over and above the minus 0.8 per cent in 2013-14) and 3.6 per cent for the fourth quarter (minus 1.6 per cent in January-March 2014).
Government officials attribute the discrepancy — lending themselves to divergent views on the state of manufacturing in the country today — mainly to the new methodology for national income accounts estimates that capture the actual value-addition taking place in the economy more accurately than earlier.
To elaborate, the IIP is a pure physical ‘volume’-based measure of production. It does not adequately reflect the ‘value’ that is added by virtue of quality improvements, higher production efficiencies, or marketing and branding innovations. Thus, a company that has made the transition from generic to branded products may produce the same volume of goods as before, but would now be adding more value.
Besides, there is also the argument regarding the benefits accruing to manufacturers on account of the sharp decline in commodity input prices over the last year and more. A refinery will add more value without producing a single extra litre of petrol and diesel, if its cost of crude has fallen much more that the price of its products.
The new series of national accounts is seen as providing more robust estimates of gross value addition happening, taking into account the value of output less the value of inputs used in a particular production process. On the other hand, the IIP, which is simply a production volume indicator, might be understating the extent of value-added growth in manufacturing.
Given all these nuanced distinctions between value addition and output volumes — and their importance in the current context of falling input costs for firms — a manufacturing growth of 7.1 per cent or even 8.4 per cent for the latest ended quarter might not statistically seem all that improbable, despite being far higher than the IIP-based data. This is what government officials are maintaining, at least for the time being.
But the ultimate test of any statistical claim pointing to a manufacturing rebound is evidence on the ground, based on actual company results. An analysis of 286 manufacturing companies that are part of the BSE-500 index list and have announced their results, shows their net sales to have registered a 2.3 per cent decline in 2014-15 over the preceding fiscal. The contraction is even more, by 15.8 per cent year-on-year, for the quarter ended March.
But it’s not just sales. As the accompanying table shows, even net profits and earnings before interest, depreciation and taxes (PBDIT) — which incorporates the effects of both operating margins and sale volumes — have recorded drops, especially pronounced in the last quarter.
That being the case, the evidence of a manufacturing recovery, leave alone buoyancy, based on increased value-addition, does not appear to be holding much water. If anything, company results are worse than before.