1. Manufacturing sector to lead economic growth journey

Manufacturing sector to lead economic growth journey

A back of the envelope calculation suggests that to achieve 5% growth in FY17 over last year, industrial output (IIP) needs to grow by 6.7% from November to March 2017

By: | Updated: January 19, 2017 7:17 AM
Manufacturing (accounting for 76% of IIP) by clocking 5.5% jump in the month has made this possible. In the GVA estimates for the full year FY17, it is seen that manufacturing GVA is likely to grow by 7.4% over the last year. (Reuters) Manufacturing (accounting for 76% of IIP) by clocking 5.5% jump in the month has made this possible. In the GVA estimates for the full year FY17, it is seen that manufacturing GVA is likely to grow by 7.4% over the last year. (Reuters)

Industrial output data in the month of November (5.7% growth over previous November) are encouraging and particularly so since the growth rate had emerged as the highest in the recent past.

Manufacturing (accounting for 76% of IIP) by clocking 5.5% jump in the month has made this possible. In the GVA estimates for the full year FY17, it is seen that manufacturing GVA is likely to grow by 7.4% over the last year. Around 72% of manufacturing GVA is accounted for by listed companies and only 23% by the quasi corporate and unorganised sector.

As the behaviour of quasi corporate and unorganised sector is better captured by manufacturing IIP, the 5.5% upward movement of the index in November implies that it may pull up the GVA for manufacturing for the full year also when the final estimates are made available later.

The PMI for November at 52.3 does fully reflect the optimism expressed by the IIP.

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It is assuring that electricity generation has moved up significantly by nearly 9% in the month.

It has been made possible by a hefty growth exceeding 23% by manufacturing of both electrical machinery and apparatus and motor vehicles, trailers and semi-trailers during the month.

The manufacturing in last November grew by a huge negative rate of 4.6% and total industry by (-) 3.4%.

This low base has made the growth in current November look impressive. Further, the steel intensive capital goods sector had nosedived by more than 24% in last November and consumer goods by a paltry 1%.

Taking April-November period, IIP growth of 0.4% in the current year as against 3.8% in last year and manufacturing growth at (-) 0.3% against 3.9% in the past is indicative of a stiff challenge facing the industry today.

Last year, industrial output achieved an annual growth of 2.4% with manufacturing clocking 2.0% growth. A back of the envelope calculation suggests that to achieve 5% growth in FY17 over last year, IIP needs to grow by 6.7% from November to March 2017 and for a 6% growth in manufacturing, the sector needs to rise by 8.5% in the next 4 months.

With imports of engineering goods showing a declining trend, it is quite likely that domestic manufacturing especially in manufacturing of automobile, auto components, shipbuilding (small and medium ships, navy ships and submarines), defence equipment, wagons and coaches, electrical and machinery equipment would get a much needed boost.

It becomes equally important for the government to monitor these activities, formulate appropriate guidelines and other timely measures to support these indigenous endeavours.

One of the most challenging steps facing Indian manufacturing sector is the competitiveness.

The primary determinant of cost competitiveness is good quality, reasonable price and adequate availability of raw materials, energy efficiency and cost effective supply chain management. The plethora of internal taxes and levies hopefully would be taken care of by introduction of GST in the coming months.

As regards steel industry, the latest hike in imported coking coal price from $92/t fob Australia to $240-260/t fob has added minimum R6,500-7,000 per tone in cost of production.

The rise in imported non-coking coal prices (including thermal) has led to increased prices of both coking and non-coking coal prices by CIL. The iron ore prices in the domestic market were recently raised albeit marginally.

Global steel prices have reflected the increased cost of coal and iron ore and also indicate a better consumer demand.It is heartening to note that manufacturing PMIs of EU (54.9), USA (54.3), China (51.9) in December 2016 is well above the indices in November 2016 indicating thereby a positive growth syndrome.

The manufacturing PMI at less than 50 marks in December 2016 for India is, in all probability, likely to move up to a safer zone in the next month.

Indian steel exports during April-December 2016 at 5.8 million tonnes reflects around 64% growth over last year and is nearly touching the imports of 6.02 million tonnes which may make India a net steel exporter in the current fiscal itself..

The author is DG, Institute of Steel Growth and Development. Views expressed are personal.

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