India's manufacturing spike may be transient: Economists

A day after the somewhat pleasing GDP data, economists have raised doubts on manufacturing moving into positive territory when industrial production and other numbers remain in the negative.

Economists, including those from State Bank of India, Care Ratings and others have said while the numbers look encouraging, they may be too good to last.

“The most astonishing number is the positive growth in manufacturing in the second quarter. Despite being the worst affected sector in the June quarter due to lockdown, it is quite puzzling how manufacturing turned itself around. The IIP manufacturing and Manufacturing GVA growth are highly correlated and this correlation collapsed in the second quarter when manufacturing in industrial production declined by 6.7% (average of July/Aug/Sept) while manufacturing gross value added (GVA) grew by 0.6%.

“We believe one possible reason for this could be stellar corporate GVA numbers in the second quarter on the back of massive purge in costs. Further, we observed small companies, with turnover of up to Rs 500 crore, are more aggressive in cutting costs, displaying reduction in employee cost by 10-12%. This could turn a potential headwind in future in terms of a drag on consumption,” said economists at State Bank of India in their publication 'Ecowrap'.

Additionally, they said, there was evidence of inventory build-up that could act as a drag on future manufacturing growth. The July-September data showed the economy had contracted 7.5% but the contraction had declined from the June quarter’s 23.9% backed by growth in manufacturing and agriculture.

According to Care Ratings, consumption demand and investments, which are necessary to propel the economy, would continue to be tepid and are unlikely to see a noteworthy improvement during the course of the year.

According to Pronab Sen, former chief statistician of India, the October-December quarter economic growth numbers will be worse than the September quarter because there will be no pent-up demand and no festive season ahead. In this scenario, manufacturing too could suffer if the government expenditure does not increase.