Manufacturing growth dips to 0.6% over slackening demand, global headwinds

A persisting liquidity crisis in the MSME added to the manufacturing sector's woes

Manufacturing growth slumped to a dismal rate of only 0.6 per cent in the first quarter (Q1) of the current fiscal year (2019-20 or FY20) from 3.1 per cent in the fourth quarter of 2018-19 (FY19).

In Q1FY19, manufacturing growth was 12.1 per cent. For the whole of FY19, the sector had clocked growth of 6.9 per cent, up from 5.9 per cent in the previous fiscal year.

The share of manufacturing in gross domestic product (GDP) came down to 15.3 per cent in Q1FY20 against 16.2 per cent in Q1FY19. The government’s flagship programme, Make in India, aims to increase this share to 25 per cent by 2022. 

Low consumer demand has negatively affected production in the automobile and allied sectors, as well as consumer goods, said economists. “While the base effect has pushed it down, the slowdown in the auto and durable goods segments is quite palpable and is getting reflected slowly in other sectors, too. The industries that have done well such as cement and steel find a reflection in construction activity, which has witnessed an increase of 5.7 per cent,” said Madan Sabnavis, chief economist at CARE Ratings.

Policymakers at the Department for Promotion of Industry and Internal Trade have, however, cited various factors for the slowdown such a slackening domestic demand, global uncertainty weakening demand for exports, and prevailing low levels of investment.

Economists said slack performance of the manufacturing sector was expected after manufacturing output in the Index of Industrial Production (IIP) had seen a slowdown. In June, it rose only 1.2 per cent, down from 4.5 per cent in May. The manufacturing sector constituted the bulk of IIP, at 77.6 per cent. Policymakers fear the sector is headed towards deep negative growth. 

As of June, 15 of the 23 subsectors in the manufacturing segment of the IIP recorded a year-on-year contraction. Slowdown in the automobile sector intensified, with production falling 13 per cent in June; in May it had dipped 6 per cent. Apparels, wood products and basic metals continued to see healthy growth in June; paper, furniture, and fabricated metal products were the biggest losers.

Production of electronic goods continued to see good growth, rising 10 per cent. This came after the government pushed manufacturing in the sector on a sustained basis over the past year through a series of benefits and the phased manufacturing program aimed at reducing imports. 

A persisting liquidity crisis in the micro, small and medium enterprises (MSME) added to the manufacturing sector’s woes. The MSME sector accounts for 30 per cent of the country’s GDP, anchoring 45 per cent of total industrial production. It also made up 48.1 per cent of total exports in 2018-19.