While Q1FY22 is expected to see a large manufacturing growth, experts say it will not paint a realistic picture of the sector. The on-paper jump will be due to a low base effect and the fact that systemic pressures in the sector have continued in the fourth quarter of FY22.
Contrary to the positive speculation regarding the health of the manufacturing sector, which clocked a 6.9 percent growth in Q4FY21 (January-March 2021), experts warn that the sector is in for tough times in the upcoming quarters.
Experts point out that growth is already calculated on a low base. Even a year back, in the January-March period of 2020, before COVID-19 set in and lockdowns began, the manufacturing sector was reeling. It had contracted by 4.2 percent then.
"This shows internal pressures in the sector have continued. Also, with domestic demand seeing a setback across the country, the challenges to manufacturing continue and are expected to exacerbate in the coming quarter," India Ratings chief economist Devendra Pant said.
India's manufacturing activity hit a major bump in May, the monthly IHS Markit India Manufacturing Purchasing Managers' Index (PMI) survey has shown. Since it is calculated on a month-on-month basis, it is considered to be more indicative of the latest health of a sector over a shorter time-frame.
Manufacturing PMI stood at a 10-month low of 50.8 in May, down from 55.5 in April, where 50 marks the line separating growth and contraction. While the fall in May has been attributed to the second wave of the pandemic, experts say this is also due to the inherent weakness in the sector, especially since industrial processes have not been as hampered during the second wave as compared to the first.
Growth figures to be high
Manufacturing, however, is expected to grow by a large margin in the first quarter of FY22 (April-June 2021). The advent of the second wave has forced units to shut down. But since the data will be calculated on the basis of April-June 2020 from a year back, when manufacturing had shrunk by a record 36 percent, it is expected to show a major growth.
"Even the Index of Industrial Production (IIP) growth in April 2021 is likely to be strong due to the weak base in April 2020. However, the growth momentum is unlikely to be strong in the months, going forward," Pant added. The manufacturing sector constitutes 77.63 percent of the IIP.
Lack of measurable data, owing to large segments of the manufacturing sector being driven by micro-, small- and medium-scale units in the informal economy is another cause for concern, they say, arguing that the sector remains stressed.
"The extent of recovery in the performance of the informal sectors in Q4FY2021 remains uncertain, and we continue to caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors," Aditi Nayar, Chief Economist, ICRA, said.
The large footprint of micro and small scale enterprises in the sector is also expected to complicate matters. "The unorganised sector and MSMEs, which are large contributors to the Indian economy, will find it extremely difficult to sustain two waves of the pandemic and the demand destruction in the last year and a half," Rajani Sinha, Chief Economist and National Director, Research, Knight Frank India, said.
GDP data released on May 31 showed that, overall, manufacturing contracted 7.2 percent in 2020-21 compared to the 2.4 percent fall during the previous financial year.
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