Economic Survey 2023: Robust capital, infra goods production marks start of private investment cycle

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The Economic Survey 2023 expects the stepped-up investment demand to become a powerful stimulus for industrial growth.

The estimates for the second half of FY23 show improvement in overall industrial growth, especially in the manufacturing sector, both yearly and sequentially, according to the Survey.

The industry sector witnessed a modest growth of 4.1 percent in FY23 compared to 10.3 percent in FY22. A combination of factors – cost-push pressures, supply-chain disruptions and China lockdown – has triggered a slowdown in the global economy. “The fading away of the base effect must have also weighed on growth in FY23,” the Survey says.

Ukraine war impact

The cost impact of the Ukraine conflict appears to have had much less impact than what was feared. The industry, throughout the year, did face high input costs imported into the country. “Fearing demand impact, the industry has been gradually passing on the higher production costs, which has led to sticky but non-rising core retail inflation,” the Survey says. The non-core retail inflation – comprising food and energy components – has been on the slide.

“The consequent decrease in overall retail inflation has thus sustained the pent-up consumer demand in the post-pandemic Indian economy, inducing an industrial recovery despite the global headwinds,” the Survey says. With the global commodity prices also on a downward trajectory and showing declining rates of India’s wholesale inflation, the Survey expects core retail inflation to relent, making domestic consumption demand much stronger to further induce industrial growth in the country. But the Survey has painted a less than encouraging picture on the export front.

Export impulse waning

“The export impulse has been waning in the first-half itself as the YoY growth of exports has declined from Q1 to Q2 due to persistently high inflation and rising interest rates in the advanced economies,” it says. Nevertheless, it feels that “the strong domestic consumption growth and investment revival are expected to keep industrial production humming.”

Government spending at the Central level appears to be having a positive impact. “This has crowded-in private investment,’’ according to the Survey. Capacity utilisation, at 74.3 percent in Q1 of FY23, has reached the tipping point of 75.3 percent in Q4 of FY22. “New Investment announced in the manufacturing sector during April-December of FY23 was five times the corresponding level in FY20,” the Survey says. The H1 of FY23 recorded the highest share of Gross Fixed Capital Formation (GFCF) in GDP among all half-years since FY15.

Robust growth

The Survey has found robust growth in the production of capital goods and infrastructure/construction goods. “This indicates the beginning of an investment cycle in the private sector,” says the Survey. The growth in core industries – comprising coal, fertilisers, cement, steel, electricity, refinery products, crude oil and natural gas – has held steady, reflecting a broad momentum in industrial activity. “Their growth underscores the importance that nation has been attaching to the indigenous presence of core capacities in the aftermath of the pandemic and the Russia-Ukraine conflict,” the Survey says.

Inventory build-up

Stock pile-up, according to the Survey, has constrained production in the manufacturing sector. For five consecutive quarters ending in Q2 of FY23, an increase in stocks had accumulated to more than 1.3 per cent of the annual GDP. Indeed, the stock build-up has played an important role in keeping the growth of manufacturing output restrained in Q2.

Uneven growth

The Survey hasn’t been quite pleased with the uneven growth across the manufacturing landscape. Some have done well and some have not. Motor vehicles, computers, electronic and optical products have done well.

“Multiple players looking to make India a manufacturing hub of semiconductors have made the investment outlook in this sector positive,” it says. Production of coke and refined petroleum has also increased.

Chemicals and chemical products such as caustic soda, soda ash, fertilisers and petroleum products have also performed well, contributing to sustaining the growth momentum in the agriculture sector. However, a few product categories, including textiles, apparel and leather, have been showing tepid growth, as export demand for these products has been mellowing with the slowing of global output and demand. Growth in pharmaceutical output has slowed due to an unfavourable base effect and the waning of the pandemic.