Factory output growth recovers in August

A day after the government came out with a dismal GDP growth figure of 5.7 per cent, there was a flicker of hope in the Nikkei’s manufacturing purchasing managers’ index (PMI) that was unveiled on Friday. The index that shows factory activity has picked up pace to 51.2 in August after it had contracted and fallen to an eight-year low of 47.9 in July.

Economists said the bounce-back in August's factory output could mean that the second half of the current fiscal could be better than the first half. They are also seeing last month’s better-than-expected manufacturing PMI figure as gradual fading of the adverse impact of structural reforms undertaken by the government on gross domestic product (GDP).

Rishi Shah, economist and consultant, Deloitte & Touche LLP, viewed the small expansion in production in August as a “measured upward move” after an initial hesitation to push up manufacturing in July, the first of month of introduction of GST.

“People would not have initially pushed up production level (in July) to pre-GST level. They would be more cautious in how to move up their production, taking into account how demand is moving. That is what is playing out,” he said.

“We will possibly see better number in second quarter (June-September). It will be due to base effect and increase in economic activity.”

Pollyanna De Lima, economist at IHS Markit that publishes the monthly the PMI data, said August saw companies resuming production after it was put off due to uncertainties on account of GST.

“In July, firms indicated that orders, production and purchasing had been postponed due to a lack of clarity about the new tax regime, but they have now been resumed as manufacturers, suppliers and their clients have become more knowledgeable of the GST rates,” she said.

Deloitte’s Shah said slowdown in economic growth had crept in even before demonetisation, but it got accentuated as it washed off the positive effect of an upswing in rural spending due to good monsoon.

DK Srivastava, chief economic policy advisor, EY India, feels that manufacturing in August could have shot up because of government’s capital spending. He, however, said the expansion in production was too small to be considered as a “turning point” in manufacturing growth. “GDP growth may pick up in the next two quarters because (by then) most of the effect of demonetisation on GDP would have gone,” he said.

an effect of...

The sagging macro-economic numbers are being seen by economists as short-term adverse impact of government’s structural reforms such as demonetisation, digitisation, GST and others.