India's manufacturing sector has been in the doldrums for quite a while now. A combination of policy paralysis, infrastructure bottlenecks, red tape, corruption, rising input prices and a stagnant economy had resulted in a fine mess. India ran the risk of missing out on its manufacturing potential. However, things might be slowly on the mend.
The first signs that the worst may be behind us has come from recent data. The manufacturing PMI (a leading indicator) for Nov 2014 came in at 53.3, the highest level in last 21 months. Core sector (which contributes 40% of IIP) growth in October 2014, came in at a four month high at 6.3%. In addition to this, auto sales posted good growth in Nov 2014. This is after two straight months of decline.
These are indeed positive signs. However, it would be unwise to extrapolate these numbers. It must be kept in mind that the recovery is a nascent one and can be derailed if economic reforms don't come in. While the PMI number is a good one, it should be noted that this index has been rising for the last 13 months. Thus, the growth has been incremental in nature and there has not been a big bang pick-up in manufacturing activity.
The auto numbers should be looked at along with the impact of the festive demand in November. If sales don't sustain, then the industry could be looking at a third straight year of decline. That the auto industry is not yet back on its feet can be gauged by the fact that the clamour for excise duty relief continues. The RBI has also not obliged the industry with a rate cut.
Thus, we believe that it will be a long hard journey for India's manufacturing sector without serious reforms. On this front, there is certainly good news. The government has already shown intent to make India a manufacturing power. A few labour reforms have already been announced. However, a lot more remains to be done. While there is every reason to cheer the recent data, we reckon that the wait for 'acche din' for the manufacturing sector will not be a short one.