September 10, 2023

Slow Manufacturing Growth and Consumption Demand

Sanjay Roy

THE quick estimates of index of industrial production (IIP) released on August 11, 2023 by the National Statistical Office provides the estimates for June 2023 with base year 2011-12. These quick estimates undergo revisions by the NSO in subsequent releases. But the decline in manufacturing and industrial growth reflected in the movements of IIP estimates also corroborates the trends of First Advance Estimates (FAE) of GDP figures in respective sectors.

It is a matter of concern that 12 out of 23 manufacturing sectors at 2-digit levels show a negative growth rate in IIP during the period April to June 2023-24 compared to the corresponding period of the previous year. These are also the sectors where we see a decline in the index of industrial production compared to May 2023, which means that the fall is not a result of an abnormal monthly fluctuation but persisting decline for the quarter April to June. Such a trend is worrisome primarily because all though consumer sentiments have picked up in the post pandemic period but slow growth and sometimes contraction in production indexes seems to continue in major sectors of manufacturing.

For both mining and manufacturing, the quick estimates show a decline in the index number of production in June 2023 compared to the previous month, even though for the April-June quarter compared to previous year the average growth of mining is 6.3 per cent and manufacturing records 4.7 per cent growth. According to the FAE released by NSO, manufacturing growth is expected to decline from 11 per cent in 2021-22 to -2.8 per cent in 2022-23. All these figures confirm that manufacturing growth and industrial production has not taken off the way it was expected in the recovery phase. In spite of successive announcements of PLI and other schemes related to manufacturing, a slow growth and dip in certain sectors in the recent past deserves closer attention.

The growth of manufacturing in June 2023-24 compared to June 2022-23 is 3.1 per cent which itself is a decline in year-over-year growth of May 2023, 5.8 per cent. If we take sequential growth rate or change in June 2023 with respect to May 2023 then there is a contraction in manufacturing output manifested by a decline in the index from 142.4 in May 2023 to 141 in June 2023. The decline is primarily attributable to a decline in the production of consumer goods which records a fall of 2.1 per cent in June 2023 compared to 5.5 per cent growth in May 2023. There has been a significant shrinkage in production of 6.9 per cent in June 2023 of consumer durables. Output of consumer non-durables although show a growth of 8.4 per cent compared to previous month but if we compare with June 2022, the growth is only 1.2 per cent. It is not only about consumer goods, the growth of capital goods in June 2022 was recorded a hopping 28.6 per cent but in June 2023 compared to previous year growth recorded is only 2.2 per cent. It might be because of the high growth recorded in the past year as a part of the initial post-pandemic phase, the growth this year might be low but the same trend is visible in the case of intermediate goods where growth recorded in June 2022 was 10.5 per cent and this year in June the growth has come down to 4.5 per cent. It is only in the case of infrastructure and construction the growth recorded in June current year, 11.3 per cent is higher than the growth recorded in June 2022 that is 9.4 per cent.

In the case of consumer goods what is being seen is a contraction compared to previous year. If it is the case that a steep growth recorded in the previous year is responsible for a contraction in the current year, that simply reflects the fact that the consumption base of our country is still very narrow. More importantly the contraction has been severe in the case of wearing apparel, wood products and furniture and also in computer, electronics as well as in electrical equipment.

The two most important sectors related to consumer durables, namely, passenger cars and two wheelers experienced a contraction in production in June 2023. Production of passenger cars fell by 9.8 per cent and two-wheelers production fell by 4.8 per cent. Notable is the fact that in the automobile sector the declining trend of growth since the global financial crisis continued in varying degrees. For all consumer goods, the pent up demand due to the pandemic seems to have lost its steam very quickly. The declining trend in manufacturing as estimated in the recent advance estimate is simply a manifestation of a slow recovery in purchasing power if not contraction for a vast segment of population who had not been able to come out of the economic effects of pandemic reflected in massive job and income loss for the working people.

The decline in consumption demand is evident also from the trends of Private Final Consumption Expenditure (PFCE) figures of National Accounts Statistics. The compound annual growth rate of PFCE was 6.74 per cent during the period 1993-94 to 2002-2003 and this has come down to a compound annual growth rate 1.43 per cent during the period 2019-20 to 2021-22. The compound annual growth rate of the consumption of durable consumer goods fell from 11.82 per cent to 4.97 per cent during the two reference periods. For semi-durable goods also the growth rate fell from 5.73 to 2.42 per cent in the same periods.

Growth of manufacturing primarily depends on the demand for durable and semi durable consumer goods and that of growth in plant and machinery. True that the prime motive of production in capitalism is of exchange value and not of use value. In other words, production is undertaken primarily not to satisfy human needs but the immediate concern is to make profit and capital is invested to do the same. But to attain a minimum level of profit, there has to be an activity level supported by demand for goods and services.

In the past decade there has been a declining trend in investment in plant and machinery by corporates because of two reasons: firstly, investments are more towards financial assets that fetch higher profitability compared to productive activities and secondly, market demand is not so exciting that stimulates higher investment in new plant and machinery. The fact on the contrary is that even if borrowings of corporates from commercial banks have increased and also there is high growth in average profitability in the recent past, but this has not been translated into higher investment in productive capacity. Hence the slow growth of consumption demand explains the slow growth in manufacturing. It is also exacerbated by the leakage through rising imports of manufacturing products and that of increasing import intensity of our exports. Slow growth of manufacturing in countries like India having huge number of unused labour force will further accentuate the problem of unemployment in the near future.