December 18, 2022

Second Quarter Estimates: Contraction in Manufacturing

Sanjay Roy

THE quarterly estimates released for the second quarter (July-September) by the National Accounts Division estimate a GDP growth of 6.3 per cent which was pegged at 13.5 per cent in the first quarter of 2022-23. It is understandable that the previous figure was relatively high because of the low base effect and growth rates show moderate trends as situations normalise. On the sectoral growth trends what seems positive is the recovery of growth in contact-intensive services particularly the hospitality industry which suffered a huge contraction during the pandemic. Trade, hotels, transport, and communication sectors continue to grow at 14.7 per cent in gross value added in basic price which is lower than the 25.7 per cent growth rate recorded in the last quarter. Agriculture and allied sectors have recorded 4.6 per cent growth but what seems to be worrying is the contraction experienced in the mining and manufacturing sector in the quarter ending September 2022. In spite of the fact that quarterly estimates are subject to certain fluctuations that average out in annual figures but decline in manufacturing value added to the tune of -4.3 per cent in situations when pandemic-led disruptions die down, is a matter of concern. The government has announced various schemes including production-linked incentives in various sectors, the list of coverage keeps increasing and the MNCs shifting production facilities to India hit news headlines, but the manufacturing slowdown continues.


This is not something which attracted attention in recent times but India’s manufacturing sector did not show an encouraging performance in the past four decades. In fact, the average growth of manufacturing in the current decade is almost the same as the average growth recorded in pre-liberalisation 1980s. In the past two decades that is 1991-2010 the average growth rate of manufacturing was even lower. The share of manufacturing in India’s GDP is roughly 18 per cent showing only a 5 percentage point increase in the past four decades. Advocates of liberalization argued that opening up markets would facilitate the inflow of foreign funds, particularly in labour-intensive manufacturing sectors, as India possesses a huge reserve of unskilled labour. In the past two decades, China’s share in global manufacturing has reached 25 per cent while India recorded less than 3 per cent share of global manufacturing value added. The share of manufacturing in India’s GDP remained stuck between 17-18 per cent. No denying the fact that the decline in manufacturing share is visible in many countries in the recent past but many of them attained a much higher share of manufacturing compared to India. In the case of China, the share of manufacturing in the GDP is roughly 29.4 per cent and that of South Korea’s 27 per cent.

For developing countries, the importance of the manufacturing sector rests on the fact that manufacturing helps move people from low-value-added agricultural activities to high-value-added jobs with very little training. An agricultural worker can easily be transformed into a factory worker in the textile or garment industry but cannot be employed in software firms or financial sector activities that require some education and training. Almost all the advanced countries of the world have undergone a manufacturing-led growth phase before being driven by services. In our case even if there has been a huge shift in employment from agriculture to non-agriculture reflected by a steep decline in the share of employment in agriculture from roughly 70 per cent to close to 40 per cent in the past four decades, the people shifted were hardly being absorbed in manufacturing activities. It is mainly low-end personal services, construction, and then retail trade that have been the major absorbers in subsequent decades. The share of manufacturing in employment also remained almost stagnant at 10-12 per cent of the total workforce. It is also important that in a globalized market domestic producers are supposed to compete with MNCs even in the local market and they have hardly any choice but to deploy technologies borrowed from the international shelf which are close to the global frontier. Since most of these technologies are capital-intensive and labour-displacing in nature they reduce the scope of employment in various sectors. True that large employment has been created in the past three decades in low-end services but even the services sector is gradually becoming capital-intensive. The issue of ‘job less’ or ‘job loss’ growth relates to the nature of demand driven by the structural pattern of growth. In the context of a very skewed distribution of income, as the case in India, labour absorption in the manufacturing sector is not going to take off easily as the demand of the rich is more inclined to financial assets and favours imported goods.


The recent trend also highlights one important fact; gross fixed capital formation in the current quarter shows an impressive growth of 10.4 per cent compared to the second quarter figures of the previous year. On the other hand, a conflicting fact is that the net fixed assets of listed companies grew at only 2.2 per cent in 2020-21 and by 2.1 per cent in 2021-22. The nominal growth of net fixed assets of listed companies is to the tune of 3.5 per cent when the nominal growth of fixed capital formation was showing a 17 per cent growth. According to CMIE in the current quarter the borrowing of listed companies shows a growth of 11.4 per cent in the quarter ending September 2022-23 which is much higher than the outstanding borrowing of the corporate sector in 2021-22 which stood at 0.5 per cent. These borrowed funds and fresh capital raised by corporates are not being used to create fixed assets. A part of the fund is used to continue regular operations and maintain working capital cycles given the rise in commodity prices, and hence credit offtake and rise in credit demand did not lead to net fixed asset creation. The second important aspect is the increasing trend of parking corporate profits in the form of equities of other companies rather than investing in building assets. This is essentially the trend in the phase of financialisation when higher shares of profits are being shifted towards financial assets rather than being used in creating physical assets. In the recent period, more than one-fourth of the funds mobilised by the corporates are being invested in financial assets. Therefore, there is hardly any sign of recovery of capital formation in the private corporate sector. In fact, as a long-term trend, the growth of investment in plant and machinery in the corporate sector shows a decline since 2006. In the manufacturing sector, the average growth of gross fixed capital formation during the decade 2000-10 was 11.7 per cent which fell to 3.8 per cent in the current decade.

The other important component of demand is private final consumption expenditure which apparently grew faster than the growth of GDP in the second quarter recording a year-on-year growth of 9.7 per cent surpassing overall GDP growth of 6.3 per cent. This is also reflected in RBI Consumer Confidence Survey which shows a rise in discretionary consumption besides the demand for necessaries. Increasing demand in sectors like travel, tourism, and hospitality is the prime constituent of the rise in consumption demand. But the consumption demand still is not in a position to stimulate investment through the expectation of profits. More importantly, the structure of consumption demand is highly skewed in India in favour of the rich. According to the National Sample Survey Organisation, the consumption expenditure of the bottom 90 per cent is just half of what the top 5 per cent spends on durable consumer goods. There is a huge gap in consumption expenditure between the top two classes and the third one if we divide the consumption expenditure distribution into twelve consumption classes categorised by the National Sample Survey Organisation. This is also linked to the growth of manufacturing in India. Manufacturing growth largely depends on the growth of demand for plant and machinery on the one hand and on the other, demand for durable consumer goods such as vehicles, refrigerators, televisions, air conditioners, and other types of white goods. Despite the fact that the demand for durable consumer goods has increased in the past two decades but the share of durable consumer goods in the average Indian consumption basket for the past three decades has been as low as 3.3 per cent.  Therefore, an increase in demand both for plant and machinery and that of durable consumer goods has not been adequate in triggering high manufacturing growth in India.