With the overall growth of the Indian economy seen tapering in the coming quarters on the back of a waning base effect and slower exports amid weak global demand, the growth trajectory could be predicated on the divergent trend between manufacturing and services segments that was clearly at play during the July-September quarter this fiscal.
While the services sector is seen as improving further in the coming quarters as Covid concerns wane, manufacturing output, which registered a contraction of 4.3 per cent in the latest reported quarter, is unlikely to show a strong rebound. Much of the performance of the manufacturing sector is predicated on the interplay between the organised corporate sector and unorganised SME (small and medium enterprises) segments, with a faltering export performance and continuing struggle of SMEs acting as headwinds, according to multiple experts contacted by The Indian Express.
A pick-up in demand due to the festive season in the October-December quarter is likely to be supportive to manufacturing output, but slower exports amid weak global demand and recessionary conditions in major economies are expected to stymie a perceptible rebound. Also, typically, demand wanes after the festive season, so manufacturing output may taper off beyond this quarter, said experts.
“I don’t see a rebound in manufacturing. The contraction will turn into a positive number, that can’t be ruled out but that’s more of statistical impact. Performance of manufacturers will be a mixed bag because undoubtedly there will be some respite coming in from lower commodity prices and some festive demand centred in the months of October-November, but there’s also the visibility that global growth is not going to be in their favour. Exports are seen lower, October print was not conducive, and rupee depreciation may play spoilsport for imports. All these factors are resulting in a mixed bag, there is no clear signal that manufacturing is seen on a better footing. The number may look better but there are no strong support factors,” QuantEco Research economist Yuvika Singhal said.
Nomura India, in a report after the GDP data release, said India’s growth rate cycle has peaked and a “broad-based slowdown is underway”. While lower inflation should help support private consumption in coming months, the lagged effects of tighter financial conditions and weak global demand will weigh on both investment and exports, it said. SBI Research said there are segments of private demand which may have contracted, particularly in manufacturing, and thus, recovery is patchy and not broad-based.
Elevated input prices impacting corporate profitability, continuing distress faced by smaller-sized firms, and tepid pre-festive stocking are among the reasons cited for the manufacturing downturn during the September quarter.
The dichotomy between the organised and unorganised segments may also be reflective of the benefits of the two key government decisions — corporate tax cut and production-linked incentive scheme — accruing more to the larger firms than the smaller ones, experts said.
“The government has taken two big steps to encourage manufacturing by cutting corporate tax rate, which applies largely to bigger firms but a lot of manufacturing in India is by companies which are either partnerships or proprietorships, which continue to pay a higher tax rate. The second measure, the PLI scheme, is very much a large-company benefit, smaller entities can’t take PLI. They are big steps but both benefit the corporates more than SMEs…the PLI is still a work in progress. Companies are ramping up capacities and outputs, and these are corporates… As they start producing, manufacturing is going to pick up but I don’t think it is going to happen that quickly. It may improve depending on how PLI fares,” said former Chief Statistician of India Pronab Sen.
“…in the GDP estimates, the corporate sector is extrapolated from quarterly returns of listed companies, for the non-corporate sector, it is the IIP. IIP has not behaved well and it is suggesting that the weakness in IIP is outweighing what the corporates are doing,” he said.
Higher input prices affected the profits of manufacturing firms in Q2, with the impact being seen more for the unorganised segment, as was reflected in the factory output measured by the Index of Industrial Production (IIP). IIP grew by 1.5 per cent in the July-September quarter, with contraction in consumer durables and non-durables, as against a growth of 9.5 per cent in the year-ago period and 12.8 per cent in the April-June quarter this year.
On the other hand, manufacturing activity, as measured by the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) has recorded expansion for 17 straight months, rising to 55.7 in November from 55.3 in October, which is being seen more as an indicator of better performance by large manufacturing firms.
After the release of the GDP data, Chief Economic Advisor V Anantha Nageswaran said on Wednesday that the Indian economy is on track to grow 6.8-7 per cent in the current fiscal and the manufacturing sector will see a rebound due to steady demand.
“The festival season was quite strong. Therefore, you will see a rebound in the numbers in the third quarter of the fiscal year…there was probably a bit of a caution ahead of the festival season, manufacturers were probably reluctant to add too much to the inventory. Now that they have had a strong festive season and they are seeing that overall demand remains steady, manufacturing sector outcomes should start to improve in the coming quarters,” he said.
The services sector, however, is seen improving further as some services such as “trade, hotels, transport, communication and services related to broadcasting” have not reached full pre-pandemic levels. “Services still have some scope for moving up because trade, hotels, hospitality may improve with people travelling. It’s a story which would play along in Q3 but not with the same intensity which we saw in Q1 and Q2. The intensity could wane a bit but it’ll play out given the festival season in Q3. Broadly speaking, services will fare better than manufacturing,” Singhal said.
“There is pent-up demand for services but we need to ask questions about GDP… (it) is over 2019-20 levels but services continue to be lower, particularly, trade, hotels and restaurants. So there is still headroom for services to go up,” said Sen.
Trade, hotels and transport services recorded a GVA growth of 14.7 per cent in July-September and a growth rate of 2.1 per cent over Q2 of FY20. For H1, that is, April-September, the levels are lower than the Covid phase.
SBI Research said “trade, hotels, transport, communication & services related to broadcasting” is the only sector that is still 7 per cent lower than the pre-pandemic level of H1 FY20 or, in absolute terms, still Rs 89,000 crore less than the H1 FY20 level, even as overall H1 FY23 GDP is 6 per cent higher than the FY20 level.