Manufacturing sector lags despite over 13% growth in GVA in Q2FY24

Though this was higher than 12.9% in the first quarter, it was nowhere close to 25% that the Modi government wants it to be

Manufacturing along with construction was one of the sectors that drove the economic growth to more than expected 7.6 per cent in the second quarter of the current financial year. Manufacturing rose 13.9 per cent in the quarter, the highest among various segments in the gross value added (GVA).

However, the headline number of manufacturing masked the lacklustre performance of the main segment of the secondary sector.

The share of manufacturing in gross domestic product (GDP) at current prices was just 13.6 per cent. Though this was higher than 12.9 per cent in the first quarter, it was nowhere close to 25 per cent that the Modi government wants it to be. In fact, it was lower than even 15 per cent that it used to be when the Make in India programme was launched. In the past ten quarters, manufacturing reached 15 per cent only in two quarters -- the second quarter of 2021-22 and the fourth quarter of 2022-23.

One may argue that the economy was just recovering from Covid-hit 2020-21 and that Covid had impacted part of 2021-22 as well. However, the first two quarters of 2021-22 showed excessive GDP growth of 21.6 and 9.1 per cent due to the low-base effect. Moreover, the services sector was more battered than manufacturing when Covid-induced lockdowns were there. Lastly, we are taking the manufacturing-GDP ratio and not manufacturing alone.

If we take manufacturing alone, the high 13.9 per cent growth rate in the second quarter of 2023-24 came on a very low base of 3.8 per cent contraction in the corresponding period of the previous year.

Bank of Baroda chief economist Madan Sabnavis said the high growth in manufacturing in GDP in Q2 this financial year is ambivalent.

"While growth is reckoned as value added which is defined as profits plus salaries, growth in sales has been negative. Hence while topline has been deficient, profits are up due to falling input costs. Therefore is this anomaly," he said.

The performance has been skewed again with infra-oriented industries doing well while the consumer goods segment has trailed in terms of turnover growth, Sabnavis said.

"We need to see revival in demand which according to the RBI is visible in October and November as stated in policy. Only then will we see more broad-based growth. High inflation has come in the way of consumption as real purchasing power is down," he pointed out.

The Monetary Policy Committee (MPC) in its latest statement said continued strengthening of manufacturing activity, buoyancy in construction, and gradual recovery in the rural sector are expected to brighten the prospects of household consumption.

Sabnavis said the methodological issues will remain as well as base effects as is the case with the Index of Industrial Production (IIP).

Anil K Sood, professor and co-founder Institute for Advanced Studies in Complex Choices, said manufacturing has struggled to grow for many years now.

"One of the most important reasons for low growth is an increasing dependence on China for capital, intermediate as well as consumption goods. China has scale and automation-led productivity advantages, and the Indian companies will need to produce for the global as well as the Indian market for them to reap the benefits arising from economies of scale," he explained.

The Indian manufacturing productivity too has declined, earlier during the Asian and the global financial crisis periods, and now during the pandemic, Sood pointed out.

"At the same time, the Indian firms have not made adequate investment in product or process innovation," he said.

In fact, the agriculture sector has witnessed nearly the same level of growth in total factor productivity (TFP) at 1.31 per cent, compared to just 1.32 per cent in manufacturing between 2002 and 2019. Agriculture’s growth in TFP has come with a growth in capital stock of just 4.4 per cent, compared to that of 6.9 per cent in manufacturing, Sood pointed out.

He said he would prefer to look at growth in IIP during the next couple of years to assess if the country is heading in the right direction.

"At this stage, we have not even recovered the output and productivity losses that the pandemic caused," he pointed out.

Manufacturing grew 5.1 per cent in the first quarter and 6.2 per cent in the IIP in the second quarter of the current financial year but these two came on a very low base of the last year.

The exact effect of the production-linked incentive (PLI) for 14-odd sectors would take time to reflect in manufacturing, though there are specific effects of the schemes.

For instance, there was a 76 per cent increase in the foreign direct investment (FDI) in the Manufacturing sector at $ 21.34 billion in  2021-22 compared to $12.09 billion in the previous year, according to government estimates.