The rebound in GDP growth during July-September, following five successive quarters of decline, has been largely on account of manufacturing. This sector grew 7 per cent year-on-year in the last quarter, compared to a mere 1.2 per cent during April-June. The fact that the 7 per cent manufacturing growth came on top of a 7.7 per cent year-on-year increase registered during July-September 2016 makes it all the more impressive.
But what is interesting is that the 7 per cent manufacturing growth, as per the GDP estimates released by the Central Statistics Office (CSO) on Thursday, is much higher than the average 2.2 per cent year-on-year growth of manufacturing for the July-September quarter based on the index of industrial production (IIP) data compiled by the same agency.
The accompanying chart shows that the difference between manufacturing growth based on GDP and IIP estimates was roughly 8 percentage points in 2015-16. This narrowed down to just over 3.5 percentage points during 2016-17. For the April-June 2017 quarter, the manufacturing sector’s growth as per the GDP data (1.2 per cent) was actually below the corresponding IIP average figure (1.6 per cent). But in the July-September 2017 quarter, the gap has resurfaced, with the GDP-based growth exceeding the IIP number by 4.8 percentage points.
One reason for this gap may have to do with methodology.
The IIP is an indicator of production volumes. It simply captures how much steel a plant has produced this year, which can, then, be compared to the levels of last year. By thus aggregating production across all companies and industries, after assigning weights based on their relative importance, it is possible to arrive at an overall IIP index.
GDP, on the other hand, measures value addition taking place in the economy. If a steel plant has produced one lakh tonnes this year, the same as last year, the IIP data would show zero growth. But if iron ore or coking coal costs have fallen and steel prices remained the same, the plant would have “added value” even with production unchanged at one lakh tonnes. Gross value added (GVA) would essentially mean totaling wages and earnings (exclusive of interest, tax, depreciation and amortization) in the economy. For measuring growth, the GVA in nominal terms has to also be deflated using a price index.
For estimating manufacturing GVA, the CSO uses quarterly earnings and wages data filed by private corporate companies listed at the Bombay and National stock exchanges. The private corporate sector has a 70 per cent share in the manufacturing GVA, with the balance 30 per cent accounted for by the quasi-corporate and unorganised segment. For the latter, the manufacturing IIP is taken as the proxy for estimating GVA.
So, how has the CSO arrived at the 7 per cent manufacturing growth figure for July-September? According to it, the private corporate sector manufacturing growth, based on the data from BSE/NSE-listed companies, amounted to 11.4 per cent year-on-year at current prices during the quarter. This growth, after adjusting for inflation, works out to about 9.1 per cent in real terms. Together with the 2.2 per cent IIP growth used for the quasi-corporate/unorganised sectors, the overall manufacturing rate comes to 7 per cent.
Senior equity analysts and economists seem convinced with the CSO latest manufacturing growth number. It is consistent with company results, which were quite good for July-September compared to the dismal April-June quarter, they say. “Overall manufacturing has definitely fared better in Q2 (the July-September quarter). Also, two additional factors helped. The first is that the festival season this time began in September itself, as opposed to October last year. This advanced the usual festive demand and showed up in Q2. Secondly, the disruptions from destocking due to the goods and services tax took place in June, affecting the Q1 numbers. The situation got normalised during Q2,” notes Harsha Upadhyaya, chief investment officer (equities) at Kotak Mahindra AMC.
DK Pant, chief economist at India Ratings, also subscribes to this view. “Companies may not have shown extraordinary growth in Q2, but the results are certainly better vis-à-vis Q1. Also, even as earnings and wages have grown, the consumer price index has remained muted, thereby translating into higher GVA in real terms as well,” he points out.
But there are concerned voices, too. The 7 per cent manufacturing growth does not square up with exports rising by a measly 1.2 per cent year-on-year during the quarter and bank credit to industry continuing to show contraction. “May be, one way to look at this whole thing is the organised sector benefiting at the cost of the informal economy post demonetisation and GST, as reflected in the performance of listed firms. But we only have anecdotal evidence and no hard data to establish that”, notes Upadhyaya.