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Manufacturing growth keeps its momentum - Views on News from Equitymaster
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  • May 14, 2007

    Manufacturing growth keeps its momentum

    The Central Statistical Organisation (CSO) released preliminary data on the Index of Industrial Production (IIP) late last week.

    An analysis of the numbers shows growth continuing in almost 60% of the industries covered by the IIP. This growth in volumes is also corroborated by the fourth quarter results of corporate India. But, as with the curate's egg, some parts are better off than others. Cotton textiles, food products, mining, and electricity have done more that their share in propping up the numbers.

    However, for those who would read between the lines, there are a few disquieting signals.

    Growth is a function of past investments and some expectations of the future demand. The year on year growth in building up of assets in manufacturing had come off from 48% in FY05 to 29% in FY06. This is now reflected in the slight slowdown that can be seen in the capital goods industry. Lower investments in transport, construction and hotels sectors a year ago are reflected in a slower growth in cement, transport equipment and machinery industries. Mind you the March 2007 growth number for capital goods industries at 13.2% is grossly positive, but is lower than the annual average of 17.7%. The last quarter average growth too is lower than the annual average, leading us to believe that the capital goods industrial growth has peaked for the current cycle.

    Also the growth in consumer goods has been indifferent since October 2006. The steep interest rate hikes in the last three months of FY07 added to the woes as demand from customers who would take recourse to hire-purchase to finance their upwardly mobile life-styles, dwindled. Also higher interest rates normally will increase savings and reduce consumption demand for goods going forward, depressing the potential growth rates in volumes.

    Erratic infrastructure: hardships will affect margins
    In FY07, the government, the sole purveyor of roads and power supply in the country, actually reduced its capital spend to meet the fiscal deficit targets. For FY08, it has envisaged even lower outlays than before on infrastructure.

    There is hopeful talk on how the private corporates and foreign companies will fulfill the lacuna through public private partnerships (PPPs). However, there is a distressing lack of the right kind of instruments needed to channelise the vast funds owned by interested financiers into building India's infrastructure. FY08 could well see little in the form of capital formation in these sensitive sectors as policy makers will be pre-occupied with the electorate's caste rather than bettering its income.

    Crucial areas of transport, storage and power transmission and distribution will choke the burgeoning growth in the other sectors by increasing costs. Lower margins will also mean lower investments in a vicious cycle as a fourth of corporate India's funding requirements is met by its own internal accruals.

    Being in a corner helps
    As the various challenges to growth escalate, affecting incomes, the politicians will learn to concentrate on economic issues in a repeat of the early nineties. Dismantling of regressive policies will give the next big fillip to the growth process sometime over the next 18 months…. we keep our fingers crossed!



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