A certain amount of optimism that was brewing for the last two months has crashed with a drop of 4.2% in the factory output in October. Manufacturing sector with a weightage of 76% has nosedived to 7.6% less growth than October of the previous year.
The sub-sectors responsible for this dismal performance are fabricated metals, machinery and equipment, motor vehicles and furniture manufacturing going down by 5.7%, 13.5%, 9.8% and 24.7% respectively. These four sub-sectors have approximately 15% share in manufacturing.
These are massive drops. The arguments that monthly data on outputs are always subject to subsequent revisions, the festival holidays in October being many may have restricted production and overall drop in manufacturing in same month of last year was minimal, cannot take away the fact that it may signal an early sign of recessionary trend in manufacturing, which is not adequately captured by PMI movement.
Specifically the consumer durable sector with a more than 35% fall in production does not indicate any immediate prospect of recovery. The sector is bearing the brunt of massive Chinese penetration in low end of the market, high cost of capital and subdued demand. The disenchantment among the strong middle income group to purchase and replace varieties of consumer durable items happens to be the major factor responsible and expensive home loans may have triggered the same.
Among the other two sectors, electricity generation has notched a healthy growth of 13.3% in October in spite of so much uncertain scene on FPAs and has led to a respectable growth of 10.5% in the manufacturing of electrical machinery and apparatus in the month. The impact is felt in growth in apparent consumption of electrical steel sheets exceeding 16% in the first 7 months of the current fiscal and as domestic availability of electrical sheets is less than demand, the import of this item has moved up by more than 15% and in April-November period the import has grown by 21%.
After experiencing poor growth and court intervention of capping the output from mines in Karnataka, Goa, Odisha and Jharkhand, the mining sector also has done reasonably well with output growth exceeding 5%.
The reasons for a non-performing manufacturing sector are, therefore, well-known. Stalled projects and initiation of fresh projects are to be facilitated by unlocking the policy logjam. The passing of land acquisition Bill, MMDR Bill, allocation of coal mines, GST Bill are eagerly awaited. A political convergence and industry concurrence remain the enablers.
Manufacturing growth continues to remain a second priority for RBI. An anticipated price rise due to supply shortage in rabi food grains is preventing RBI to announce any cut in interest rate. The question is how long can growth be sacrificed on an anticipated risk perception that may or may not happen.
Meanwhile, the visible demand growth in specific sectors is catered to by higher imports. Steel consumption growth by 1.3% in the first 8 months of the current fiscal is contributed by a meagre 2% rise in indigenous steel production while import has grown by more than 49%. The clarity on policies equally supported by a pro-industry RBI can even do wonders in manufacturing performance and convert ‘Make in India’ policy patently successful.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal