Skip to main content

Manufacturing activity pushes up GDP growth

Manufacturing activity pushes up GDP growth
Manufacturing activity in India rebounded in the second quarter (Q2) of FY18, as companies ramped up production to meet the festive demand, pushing up overall economic growth.Investment activity also witnessed an uptick after lackluster performance in the last two quarters.

Over the last two quarters, economic growth in India had slowed down, as the economy dealt with the twin shocks of demonetisation and the goods and services tax (GST). But gross value added (GVA) rebounded in Q2 FY18, growing by 6.1 per cent, up from 5.6 per cent in Q1.
Core GVA, which excludes agriculture and government spending, grew by 6.8 per cent —up from 5.5 per cent in Q1, as government spending slowed down sharply.It had dipped toalow of 3.8 per cent in Q4 FY17.

This rebound in growth is driven by the manufacturing sector.The sector grew by 7 per cent in Q2, adding 1.28 percentage points to growth.In the previous quarter, manufacturing value added had grown byamere 1.2 per cent as companies cut back on production and destocked inventory to prepare for the GST regime.

But that affect now appears to have reversed.“In the first quarter, companies cut down on inventories and therefore the production numbers in that quarter came down.In the second quarter, because of the expectation of festive demand, production levels have gone up and no inventory was used, which would normally have been the case. Therefore, the case of the number going up.
If this view is right, that sales have been made from new production, one can expect growth numbers to be maintained or accelerate in the coming quarters as companies need to rebuild inventory,” said Madan Sabnavis, chief economist, Care Ratings.Others concurred.
“There has been a higher offtake in the months of August and September, especially for the consumer facing industries like automobiles had a good output.Manufacturing activity is reaching a level of normalcy, post GST impact, some issues have been resolved, some are in the process.The growth rate will continue.

However, one should see the growth rate for the entire first half of the financial year, not just the second quarter.There was a postponement in consumer demand in the first quarter,” said MS Unnikrishnan, managing director and chief executive officer, Thermax.

But experts aren´t sure whether this uptick is sustainable.“The impact of the adjustment to GST on output may not have completely dissipated in some sectors.For instance, anecdotal evidence suggests that the working capital cycles of exporters remain elongated.

Moreover, smaller businesses appear to not have fully adjusted to the procedures of the new system,” says Aditi Nayar, principal economist at ICRA.On the expenditure side, notwithstanding limitations, the data shows that both private and government spending has slowed down.Private consumption expenditure recorded it slowest growth in the last eight quarters, growing at 6.5 per cent in Q2.

Asimilar slowdown was seen in government spending which grew atamere 4.1 per cent in Q2, down from 17.2 per cent in Q1.“Consumption growth eased mildly onasequential basis, albeit to a multi-quarter low in Q2 FY2018.The surge in consumption post demonetisation and pre GST, may have led to some fatigue in demand, even as overall income levels and sentiments remain healthy,” said Nayar.

But slower consumption growth was offset by higher investment activity.Gross fixed capital formation, which connotes investments, grew by 4.7 per cent in the second quarter, adding 1.3 percentage points to growth.
This is the fastest growth in the last five quarters The uptick, while surprising given the slowdown in general government spending, appears to mirror the upturn seen in the capital goods segment of the index of industrial production (IIP). The segment had grown by 3.7 per cent in Q2, after contracting by 4.2 per cent in the first quarter.
The Business Standard, New Delhi, 1st November 2017

Comments

Popular posts from this blog

RBI minutes show MPC members flagged upside risks to inflation

RBI minutes show MPC members flagged upside risks to inflation Concerns about economic growth and easing inflation prompted five of the six monetary policy committee (MPC) members to call for a cut in the repo rate, but most warned that prices could start accelerating, show the minutes of the panel’s last meeting, released on Wednesday. The comments reflected a tone of caution and flagged upside risks to inflation from farm loan waivers, rise in food prices, especially vegetables, price revisions withheld ahead of the goods and services tax, implementation of house rent allowance under the 7th pay commission and fading of favourable base effect, among others. On 2 August, the panel chose to cut the repurchase rate—the rate at which the central bank infuses liquidity in the banking system—by 25 basis points to 6%. One basis point is one-hundredth of a percentage point. Pami Dua, professor at the Delhi School of Economics, wrote that her analysis showed “a fading economic growth outlook, as …

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

Differential Tax Levy under GST: Food Firms May De-Register Trademarks

Differential Tax Levy under GST:Food Firms May De-Register Trademarks The government’s decision to charge an enhanced tax rate on trademark food brands is leading several rice, wheat and cereal manufacturers to consider de-registering their product trademarks. Irked by the June 28 central government notification fixing a 5 per cent goods and services tax (GST) rate on food items packaged in unit containers and bearing registered brand names, the industry has made several representations to the government to reconsider the differential tax levy, which these players say is creating an unlevel playing field within these highly-competitive and low-margin industries. Sources say that the move has affected the packaged rice industry the hardest and allowed the un-registered market leaders, India Gate and Daawat, to gain advantage as compared to other registered brands such as Kohinoor and Lal Qilla. Smaller players are even more worried with this enhanced rate of tax (against the otherwise …