E-Paper
Situating India’s manufacturing challenge in the short-term and long-term
IIP, the official tracker of monthly economic activity in mining, manufacturing and electricity generation contracted in January, in contrast with some high frequency indicators such as Purchasing Managers’ Index for manufacturing which has been doing very well in the past few months
The Index of Industrial Production (IIP), which is the official tracker of monthly economic activity in mining, manufacturing and electricity generation contracted by 1.6% in January, under-performing estimates by economists polled by Bloomberg of a 1% growth. The Index of Eight Core Industries, which measures the state of economic activity in coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity also grew at a mere 0.1% in January. Both data points are in sharp contrast with some high frequency indicators such as Purchasing Managers’ Index (PMI) for manufacturing which has been doing very well in the past few months. What is the big picture on the state of manufacturing in the Indian economy? Here are four charts which explain this.
The post-pandemic recovery in manufacturing is still fragile
That the economy has recovered after removal of lockdown related restrictions is beyond doubt. The GDP growth figures -- they have improved from a 24.4% and 7.4% contraction in the quarters ending June and September 2020, to 0.4% growth in the December quarter -- are the biggest proof of this. The Gross Value Added (GVA) component of manufacturing has also shown a steady recovery from a 35.9% and 1.5% contraction in the June and September 2020 quarters to a 1.6% growth in the quarter ending December 2020.
However, a look at the monthly IIP and core sector growth numbers tells a different story. While there was an uninterrupted recovery from May to September 2020 – India imposed a lockdown beginning March 25, 2020 and started gradually removing restrictions from May onwards – its nature has become erratic after that. For example, the manufacturing component of IIP slipped into contraction zone in November 2020, recovered in December and has gone back into contraction mode in January . Similarly, the Index of Eight Core Industries slipped back into contraction zone in October and November 2020. While it re-entered positive growth territory in December 2020, it lost growth momentum in January.
The picture is even more bleak if the base effect is filtered out
The Indian economy was facing a protracted slowdown even before the pandemic threw economic activity into disarray. This also means that there is a favourable base effect at play for calculating post-pandemic annual growth rates for most economic indicators. A comparison of annual growth in IIP’s manufacturing component and Eight Core Industries in January shows this clearly. Growth rate of both these indicators has been lower since January 2019 than it used to be earlier. The January contraction in IIP’s manufacturing component and marginal growth in Eight Core Industries has come on the back of already low growth rate in January 2019 and January 2020. The absolute value of IIP’s manufacturing component in January was actually lower than even the January 2019 value.
Manufacturing has consistently lost momentum over the past decade
The predicament of India’s manufacturing sector is not a story of a slowdown in the last couple of years. A long-term analysis of Gross Value Added (GVA) data from the Centre for Monitoring Indian Economy’s (CMIE) database shows that there has been a long-term deceleration in manufacturing growth in the last decade. A comparison of compound annual growth rate (CAGR) in manufacturing GVA across decades shows this. While manufacturing growth gained momentum in the 1990s and 2000s, the CAGR went down between 2011-12 and 2019-20. The current financial year (2020-21) has been excluded to filter out the pandemic’s disruption. While overall economic growth itself lost momentum between 2011-12 and 2019-20, manufacturing lost more in growth than the overall economy.
What is to be done?
India’s manufacturing challenge has a short-term and long-term aspect to it. While it is crucial that the current manufacturing activity picks up on a sustained basis and at least attains pre-pandemic levels, any sense of complacency based on the improvement in numbers from March onwards -- largely due to a favourable base effect -- risks side-tracking the economy’s attention from the larger challenge of overcoming what is clearly a prolonged slowdown in Indian manufacturing. A rejuvenation of India’s manufacturing sector growth will take both demand- and supply-side interventions.
The demand-side aspect of it is more pertinent in dealing with the short-term challenge. One of the biggest reasons for a disappointing growth in January IIP was poor performance of the consumer goods sector, which contracted 4.2% on an annual basis. When read with latest findings (January) from the Reserve Bank of India’s Consumer Confidence Survey (CCS) -- the CCS is conducted in India’s 13 major cities, and measures perception on general economic situation as well as spending on non-essential items – which continued to be in negative territory, it is clear that industrial production is facing a demand constraint. The growth in previous months can be attributed to what many economists have described as being caused by pent-up demand. Unless this changes, a sustained recovery will not materialise.
To be sure, demand is not the only challenge facing India’s manufacturing. This year’s Economic Survey compared the export performance of India and Bangladesh and concluded that one reason why Bangladesh has done better on this front is that it has specialised in exporting goods where it has a comparative advantage. Given the fact that both India and Bangladesh are labour abundant countries, their comparative advantage would lie in exporting labour intensive goods. “While Bangladesh’s export basket is in keeping with this economic reality — textiles, footwear and apparel constitute 90% of its exports — around 40% of India’s exports are capital or technology intensive”, the Survey found out.
Given the fact that India’s domestic market is much bigger than Bangladesh’s -- India’s GDP in current US dollars was $2.9 trillion in 2019 compared to Bangladesh’s $302.6 billion – a revival in mass demand for labour intensive products could generate the necessary tailwinds for export competitiveness as well. This is what former RBI governor Raghuram Rajan suggested when he made a case for a ‘Make for India’ instead of ‘Make in India’.
