NEW DELHI: The manufacturing sector in the second quarter sprang a surprise with double-digit growth, helping the economy to put up a robust performance.
The sector gross value addition (GVA) grew at 13.9% year-on-year (YoY) in real terms in the second quarter of the current financial year (Q2FY24) as against 4.7% in the previous quarter. The sector was one of the main drivers of growth in Q2, when the economy grew at 7.6% (real term), much higher than the estimated 6.8-7%.
The growth in the sector, along with other industrial sectors, has stoked a sense of optimism with analysts and experts hoping the GDP to grow at 7% in FY24 instead of 6.5% predicted by the RBI. Though some analysts believe the bump up in manufacturing in Q2 was largely due to a low base effect – the manufacturing GVA in Q2FY23 fell by 3.8%. Many feel private investments have taken off, and the shift away from the global supply chains from China has begun to bear fruits for the Indian manufacturing sector.
As per Rumki Majumdar, economist, Deloitte India, double-digit growth in the industry sector, mainly in manufacturing and construction, is suggesting businesses raised production to meet pent-up demand just before festivals.
As per a report by ICICI Securities, after eight years of external and domestic de-leveraging, the economy is poised for more private investment. Gross fixed capital formation (GFCF), which measures investment in the economy, grew at 11% YoY in real terms. Though the investment growth has largely been driven by government spending, analysts have begun to see private sector investments catching up.“Investment data points to the fact that private capex spending is gaining steam—government capex is crowding in private spending in households and corporate,” says Majumdar. The Q2 growth in the sector was reflected in the Index of Industrial Production (IIP) and the Manufacturing Purchase Managers Index (PMI). IIP grew at 7.4% in Q2FY24, while PMI averaged 57.9 during the quarter.
Can manufacturing sustain growth?
In the first half, manufacturing GVA grew at 9.3% as against 0.9% in the same period last year. Apart from the low base effect, the sector has benefited from a fall in raw material prices, evident from the negative deflator seen during the quarter. As per India's Ratings, a favourable base effect and benign input cost pressures helped the industrial sector in Q2. Would these favourable effects dissipate in the second half of the year?
“This pattern of manufacturing sector outperformance over services could persist till Q3, due to base effects as GVA had declined in Q2FY23 and Q3FY23. The support from weak deflator growth is expected to reduce in H2FY24 as WPI inflation turns mildly positive,” says Gaura Sengupta, Economist, IDFC Bank.
Private consumption, which remained muted in Q2, could see healthy growth in Q3, mainly because of the festive season. This should help maintain the manufacturing growth in Q3. The real test would be Q4FY24 when most of the tailwinds and favourable conditions vanish.
As per Nomura, the non-synchronous timing of Diwali this year (in Nov as opposed to Oct last year) means most high-frequency growth indicators will be elevated on a YoY basis in October, but will also record a sharp drop in November when the opposing effects kick in.
“So far, the partial deck of growth indicators for October demonstrate continued strength. Consumption indicators (like vehicle sales, diesel sales, bank credit growth, railway passenger traffic and consumer goods import growth) have picked up,” says the report. However, the consumption growth has largely been driven by higher-income urban households. Rural consumption remains a worry.
Sunil Kumar Sinha, Principal Economist and senior Director – Public Finance, at India Ratings and Research, says the below-par growth in the agriculture sector implies the rural demand is under stress, which is preventing consumption demand from being broad-based. “The same is getting reflected in the subdued sales of FMCG products in the rural areas. As such the impact of kharif production on rural demand will be visible in Q3 when the rice procurement takes place,” says Sinha.
