Explained-Manufacturing Growth: Why Govt’s figures don’t add up

Nuanced arguments about ‘value’ may square up statistically for now, but company results belie claims of a manufacturing rebound.

Written by Sandeep Singh , Harish Damodaran | Updated: June 2, 2015 4:14 am
Indian Economy, India GDP, India GDP growth, India GDP 2014-2015, India economy news, India GDP news, Indian economy growth, Growth, Reserve Bank of India, Indian express, business news, Sensex, Sensex RBI, Sensex rise, GDP data, Indian express 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.

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).

manufacturingGovernment 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.

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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.

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  1. Manish Garg
    Apr 29, 2016 at 3:39 pm
    gross value addition is better captured in gdp growth versus volume growth in iip, also bse company s and profit doesnt add up to the positive numbers on manufacturing growth
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      prashant
      Jun 2, 2015 at 1:52 pm
      1) Coffin Scam 2) Misuse of Kargil cess 3) Irregularities in purchases made for operation Vijay (Kargil War) 4) UTI and Cyberspace Infosys Ltd. Scam 5) Petrol Pump and Gas Agency Allotment Scam 6) Judeo Scam 7) HUDCO Scam involving Former Union Minister Anant Kumar 8) Plot Allotment Scam 9) Medical Procurement Scam 10) SNL Disinvestment Sacm 11) Jain Hawala Case 12) Raman Singh Named In Chhattisgarh Bank Scam 13) Kachra Scam 14) Irrigation Scam of Maharashtra 15) Paddy Scam 16) Chhattisgarh 'womb removal insurance scam' 17) MP salt scamRs.714 crore scam Madhya Pradesh 18) Madhya Pradesh Health Minister Ajay Vishnoi quits after Income Tax raid on brother’s premises – 500 crore 2008 19) Rs 30,000 cr coal scam loss caused by MP Chief Minister Shivraj Singh Chouhan 20) Madhya Pradesh's Rs. 9 crore NREGA scam 21) Scholarship disbursal fraud unearthed in Madhya Pradesh 22) 17 'scams' that Narendra Modi doesn't want Lok Ayukta to probe 23) Adani Group Land Allotment Scam 24)Tata Motors Plant Controversy 25) Gujarat Gas Deal Scam 26) Modi’s Gujarat – Land of Scams 27) BJP MP Dinu Bogha Solanki from Gujarat arrested for RTI activist's murder 28) Snooping Scandal 29) Land scam case against Vasundhara 30) Money laundering case against Vasundhara Raje's son 31) Centuar Hotel Scam 32) urappa Land Scam 33) Babu Bokoria Scam in Gujurat 34) Bangaru Laxam Scam 35) 400 Crore Fishery Scandal in Gujurat11
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        prashant
        Jun 2, 2015 at 1:23 pm
        When Prime Minister Narendra Modi first spoke of his government’s intention to repeal one outdated law every day, he may not have imagined the extent to which his government would go to achieve the target. It has now come to light that at least 30 laws that already stand repealed are part of an amendment bill introduced by the law ministry in parliament earlier this month. Sources said the Prime Minister’s Office (PMO) is upset over the faux pas.
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          Shankar
          Jun 2, 2015 at 5:03 pm
          in such short span of time by their various governments so many scams... Imagine if they were to rule longer
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            P N
            Jun 2, 2015 at 2:32 pm
            Release an exaggerated figure and let it impress the minds of people. The figure could be corrected 3 months down the road by giving a different spin. People would have forgotten about it anyway in 3 months. The trick is to be first off the blocks in giving figures and brazenly boast about it . Jaitley remarked sarcastically that the highest growth rate in the world cannot be fragile in a rejoinder to MMS who had described the economic condition as fragile.
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