There is a constant downward trend registered in manufacturing components of IIP, especially from May’16 onwards. The demonetisation and GST have affected the sector, but that is expected to be only TEMPORARY.

Herein, we tried to analyse the key components of manufacturing, which are constantly showing soft print. Sub-sectors which show at least 10 declining monthly points are labelled as weakest sub-sector in the manufacturing index. The ‘smoothed’ trend of their growth is depicted below.

The growth in the above four sub-sectors has a downward inclination. Electrical equipment and textile are showing continuous downward print from April 2013 onwards. Motor Vehicle segment which started picking up from the beginning of CY 2015 again started falling post demonetisation. Food Products segment which was flat during 2013 through 2014 shown declining trend from April 2015 onwards.

Though in recent prints softness can be seen in chemical, refinery and basic metal which together accounts for around 32% of IIP, overall trend is not very discouraging.

But what are the triggers which will revive these sectors, let us delve deeper into this:

Textile:

Fluctuation of cotton prices some years back led to losses and made it difficult for the indebted textile unit to recover from the losses. It may be mentioned that around 96% of our total cloth production is in the decentralised segment and cloth production this year is almost static vs previous year.   Not only this, export growth is muted; countries such as Bangladesh and Vietnam have left India behind in their race to the top. Despite being the second most significant sector providing employment jobs growth in the sector is almost ‘nil’.   Duty-free access or minimal duty advantage for competing nations also added to the woes.

The sector is yet to reach its full potential in view of the inefficiencies. Plugging out the inefficiencies is pertinent as this labour intensive sector can create jobs and thus can lay foundation for economic growth. Not only this, a shift in focus is needed to tap domestic market through quality improvement.

Electrical Equipment:

Sluggish growth in the country’s power sector and delays in project execution, and the shaky financial situation of state power distribution companies had severely hit domestic electrical equipment manufacturers. It may be mentioned that the heavy electrical equipment industry is facing problems like non-availability of credit, non-adherence of payments by customers leading to distorted health of power distribution companies, global slowdown during the past few years impacting export, deferred order due to slack in investment sentiment, etc. Of late, post demonetisation even the light Electrical Equipment industry has taken a hit due to softness in “consumption demand, which we feel is more of a temporary phenomenon.
Further, the onset of cheaper import from China also poses another threat to the industry. Thrust is needed to plug out structural issues in the sector. If we see the latest growth index of the sector, four segments are in red: Conductors, HV SW Gr, meters, and insulators. Given its forward and backward linkages in the economy, the importance of the sector is immense.

Motor vehicles, trailers & semi-trailers

This sub-component of IIP, unlike other identified weaker counterpart, was rising and steadily continuing in the positive zone from the start of 2015. Immediately prior to this high-interest rate, high fuel cost, weakening rupee impacted the sector. It may be mentioned that from January 2015 onwards RBI began its Rate Cut cycle.
The sector started showing declining trend, post demonetisation as it has temporarily taken away purchasing power from the general Public. The immediate slump in the production, post Note Ban announcement depicts the demand-centric nature of the sector.
Going ahead, lower rates, stable rupee, limited rise in fuel cost apart from the release of the Pay hike, and better Rabi Crop is positive for the sector. The forthcoming numbers are essential to establish the trend.

Food Processing Industries

The food processing industry is at a nascent stage as only around 2% of total Agricultural Produce is processed in India. Major bottlenecks of the industry still remain same for eg., high seasonality , low farm productivity, inadequate cold chain storage, lack of specialised transport vehicle, lack of skilled and trained manpower, inadequate quality control and packaging units etc. Food processing industries dependence also loosely related to monsoon. Two years of continuous drought also has an impact on the growth of food processing industries in 2014 and 2015. While in 2016 note ban seems to have hit the industry despite good monsoon. We feel that there is a good prospect for the industry, but addressing structural issues are urgent.

In fine, we are of the view that besides Money Policy thrust, further special attention is required as these industries are not only weak but also have their immense capability of creating forward and backward linkages in the economy. However, identification of these sectors does not reduce the importance of other sectors, especially, sectors like Basic Metal, Chemical & Chemical Products, Refinery Product which recently shown signs of softness and these along with other sectors need sustenance of the recovery/growth momentum.