The Hindu Explains: From Cyril Ramaphosa to Meenakshi temple fire

What is the lowdown on industrial renewal

What is it?

Industrial activity, as measured by the government’s Index of Industrial Production (IIP) and the private sector Purchasing Managers’ Index (PMI), has improved significantly over the last two months. Growth in the IIP soared to 8.8% in November, the highest since October 2015, and stood at a slightly slower but still robust 7.07% in December. These two instances mark a return to above 5% growth after a year. Within the IIP, growth was largely driven by the manufacturing sector, which grew 10.7% and 8.4% in November and December respectively. Similarly, the PMI surged to a 60-month high of 54.7 in December and came in at 52.4 in January. These two sets of data are interesting because not only do they show the picture from both the government and private sector sides but also highlight different elements of the sectors they measure. While the IIP is an output measure, the PMI is an indication of the activity at the input, or purchasing, level. If both show strong growth, the implication is an overall recovery in industrial activity and sentiments.

How did it come about?

Given that the average growth in the IIP in financial year 2017-18 prior to November was only 2.5%, the months of November and December certainly stand out as outliers. To understand what happened in these two months, it is important to understand what happened before.

The November 2016 demonetisation had a major impact on industrial activity. For example, growth in the IIP was a relatively robust 5% in November 2016, but slowed to 1.2% by February 2017. Activity resumed thereafter, but was hit again by the prospect of the Goods and Services Tax and then its fallout.

Industrial activity contracted in June because firms halted production to get rid of their stock in preparation for the GST, which rolled out on July 1. Similarly, July saw only 1% growth as companies came to terms with the new tax regime. A combination of the impending festive season and the re-stocking of inventory led companies to increase their activity thereafter, with a recovering global economy boosting exports, which further propelled industrial growth in November and December. There were other factors at play, such as companies getting increasingly comfortable with the GST regime, the government taking steps to ease the woes of exporters who saw a large chunk of their working capital tied up because of the input tax credit system, domestic demand recovering somewhat, and the government investing heavily in roads.

Why does it matter?

The recovery in manufacturing and in the overall industrial sector should come as some relief to the government, which has come under criticism for the impact demonetisation and the hurried roll-out of GST had on economic growth. Economic growth itself is expected to increase, with private sector analysts and economists saying there are signs of a recovery. With economic growth should come job creation that is needed. However, it is worth keeping in mind that the IIP and the PMI measure only the formal sector. Several accounts say the informal sector, a very large segment of the economy that accounts for significant employment, is still recovering from the effects of demonetisation. That effect has not been effectively measured, and any talk of a recovery leaves the informal sector out.

What next?

A significant part of the recovery is based on how the global economy does. Any dip there will have a detrimental effect on India’s exports which, in turn, will dampen industrial growth. Recently, U.S. President Donald Trump spoke against India for imposing a “tremendous tax” on the import of Harley Davidson motorcycles, pitching for a “reciprocal tax” in the U.S. Whether this happens or not, such statements add to the uncertainty over Indian exports. That said, most commentators do say there are signs of recovery in the economy and in the manufacturing sector in particular.

Related Topics
This article is closed for comments.
Please Email the Editor

Printable version | Jul 14, 2020 7:39:16 AM | https://www.thehindu.com/business/Economy/what-is-the-lowdown-on-industrial-renewal/article22785218.ece

Next Story