Did the surge in manufacturing data ride on channel pushing?

Post demonetisation, manufacturers began pushing dealers to lift goods from their factories

Did the jump in manufacturing data for the third quarter of 2016-17 ride on the back of channel pushing by manufacturers, in December? This is a possibility as India’s former chief statistician Pronab Sen points out. But while government’s tax data corroborates it, the evidence from the second advance estimates of national income, for 2016-17 released on Tuesday, do not do so, fully.

According to Sen, post the demonetisation announcement by the government in November 2016, segments of the manufacturing sector began to push their dealers to lift consignments from the factories. “Since the Central Statistical Organisation reads the data on manufacturing from despatches made from the units, you can see the co-relation with the tax data”, he said.  

The finance ministry’s tax data does indeed bear him out. In December 2016, the net indirect tax grew at the rate of 14.2 per cent compared to the corresponding month of last year. Within it, the net collection for Central Excise was even more impressive at 31.6 per cent, year on year. This is even more so when one accounts for a robust performance of Central Excise a year ago. It recorded a huge rise of 57.5 per cent, year on year. The unexpectedly strong performance of indirect tax in the third quarter of 2016-17 had surprised many analysts.

The incentive for channel stuffing, according to Sen was the chance for small-ticket dealers to pay for the same through old currency notes. This was indeed true for SIM card sales, for instance, a phenomena which also attracted the attention of RBI.

As the second advance estimates show, the Gross Value Added for manufacturing at basic prices for the third quarter did rise handsomely to 11.8 per cent year on year. It outdid the performance of the manufacturing sector in the same third quarter of 2015-16. For the purpose of comparison, we use the data at current prices because the GDP numbers are first computed with current prices and so reflect the movements more accurately.

Problems arise in tracking the same data through another measure — change in inventory or stocks. The hypothesis is that there has been no rise in manufacturing sector but only of stocks being pushed out of the factory, which in turn gets reflected in the national income statisticians’ ledger.   

Let's look at the expenditure side of the national income. The changes in stocks for the third quarter (again, measured at current prices) have been flat. It is 2 per cent for the quarter, 2.1 for second quarter and 2.2 for the first quarter of 2016. The figures are almost a carbon copy of the numbers from a year ago at 2, 2.2 and 2.2. In other words the movement of inventory for the manufacturing sector has not seen any blip. There is a conundrum here.

If the manufacturers had pushed out merchandise to their dealers in the post demonetisation days, it would bear out another hypothesis. The performance of the sector in the fourth quarter should come down, as the dealers would refuse to offload more goods till they clear their current stocks. Does the advance estimates for the full year indicate a softening of the performance of the manufacturing sector because of the supposed glut in inventory. The numbers don't say so. The estimate for the whole year is 10.3 per cent from the current 10.5. It does not give any evidence of a softening in manufacturing, going ahead.