Industrial manufacturing seems to be in a mess which needs immediate attention and focused intervention from finance minister Arun Jaitley who’s already juggling too many tasks for the Narendra Modi government.
Fastest dip in manufacturing and resultant contraction in industry growth for the first time since the global financial crisis in February 2009 has brought to fore the deep crisis staring in the face for Indian companies.
Industry and purchase managers are virtually in a scare given that Nikkei India Manufacturing purchase managers Index (PMI) hit the lowest mark at 47.9 in July this year in over eight years. A dip in the index below 50 means contraction in manufacturing has begun to set in, collapse in demand for goods and industry is stuck with inventory of both finished and intermediate goods across sectors.
Goods and Services Tax (GST) introduction seems to have disrupted manufacturing though Jaitley’s ‘A’ team thinks that it was a “temporary blip” that would get corrected in a few weeks. In fact, even industry seems to have been taken aback by the continued slide in retail sales of consumer durables, white and brown goods.
About 45 per cent lower retail sales in July 2017 have been attributed to inordinate delay in the roll out of GST compliant networks. And, 70 per cent slide in retail sales in June 2017 was registered as retailers were busy clearing up stocks and did not make fresh purchases. Even if purchase orders were placed, deliveries were not taken. Even then inventory build up scared the retailers owing to the demand slump.
Optimism of sales triggered by heavy discounts and stock clearance sales ahead of GST roll out hasn’t happened if the Nikkei India PMI is any indication.
Several newspapers, including Financial Chronicle, front-paged reports of a huge jump in sales of automobiles due to lower incidence of GST across the range of vehicles ranging from 2.5 to 12 per cent. Automobiles seems to be the only sector that bucked the trend and quickly adjusted to the new GST regime triggering double digit growth in sales during July 2017. During the month, automobiles sales hit a crescendo with highest numbers at 2,95,403 cars sold across categories.
While automobiles alone may not be able to pull the entire manufacturing sector out of gloom, the wide spread pessimism and perception issues seem to have deepened the negative sentiment further. Unless the Narendra Modi government unleashes drastic measures to trigger an industrial growth revival, smooth transition into GST may remain a mirage.
Industrial growth was definitely the weak-link in Narendra Modi’s economic management paradigm. A 25 basis points cut in repo, reverse repo, marginal standing facility and the bank rates could only be a starting point for industry and manufacturing growth in near term. Lower cost of funds could only help stimulate demand for products and thereby support industrial activity revival, liquidating inventory and thereby resumption in business cycle.
Only redeeming factor was the continued growth in export orders during July 2017. Keeping this momentum induced from external orders would in fact help support industrial and manufacturing activity.
One needs to cash-in on prevailing 11-month high confidence and positive sentiment prevailing in the market. Also, 12-month positive outlook for manufacturing needs to be judiciously exploited.
For that to happen, government will have to roll out more reform measures that would directly push up growth and bring back jobs in factories. Quickly calibrating the industry with new GST regime would be helpful. But, dismantling decades-old state sponsored pricing structure in a range of products in a time bound fashion, leading to decontrol of various goods and services will provide fresh impetus to growth engine.