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Improvement Likely In Pockets Of Industry

The RBI’s quarterly numbers on corporate performance show that industry sales declined by over 10 per cent from the previous year in the second quarter of 2015-16.

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That India’s industrial performance is wanting is well known. The official Index of Industrial Production (IIP) has shown a contraction in the months of November and December 2015. The RBI’s quarterly numbers on corporate performance show that industry sales declined by over 10 per cent from the previous year in the second quarter of 2015-16. It is unlikely that the overall picture has changed drastically in the third quarter.

Nevertheless, everything is far from lost.

In fact, in looking at the big picture, we may just be missing out on two strands of emerging growth stories. The first is the positive growth rates among relatively small industries, and the second is the potential for consumption-led industries. Improved outlook for industry as a whole would further buoy these segments, though major industries could still be relatively slow to grow.

Rise of the Small Industry
An analysis of the RBI data on corporate performance for the second quarter shows that there are 17 industries that have shown positive sales growth in the quarter, accounting for almost 51 per cent of total industry sales. The RBI data on corporate performance is based on the bank’s compilation of financial results of companies, former government companies and financial services companies.

The analysis of the 17 segments shows that 14 of these industry segments have a less than or equal to 5 per cent share in overall industry sales, where industry is defined as comprising of manufacturing, mining, utilities and construction. Of these, six are industries with a less than or equal to 2 per cent share in total industry sales, including the wood, paints and varnishes, leather, some metal products, among others. Eight other segments have a share between 2-5 per cent. Only three segments — motor vehicles or automobiles, construction and pharmaceuticals — have a share of over 5 per cent.

It needs to be noted, though, that of these growth segments, only two — automobiles and pharmaceuticals — have seen a double-digit growth. All the other industries have shown growth less than or equal to 5 per cent, with some segments like machine tools and fabricated metals, actually showing less than 1 per cent growth.

Nevertheless, this is still a sharp contrast to the performance of some of the other largest industries, which are contracting fast. Major industries like petroleum, iron and steel, which together alone account for over 17 per cent of total share in industry are showing fast paced contraction. While the petroleum industry contracted by as much as 37 per cent, iron and steel contracted by around 14 per cent.

On the whole though, the proportion of industries showing a sales decline, is actually lesser than that showing an increase in sales at 49.1 per cent, but only by a small margin. But the extent of decline in some of the industries is far sharper than the increase in the industries that are showing growth, which has resulted in an overall decline in industrial growth.

While the fall in commodity prices worldwide has significantly aided companies with even falling sales to improve their margins, in terms of margins’ growth, the trend cannot continue. This is particularly true since there is limited impetus for sales improvement in a number of industries in the segment.

Boosting Consumer-driven Firms
The one segment of industries that could see better times, however, is consumption-driven ones. A quick look at the industrial production numbers alone shows that consumer goods production has risen faster than that for the entire IIP basket. Over the April-December 2015 period, consumer goods production has grown by 4.3 per cent — one whole percentage point faster than overall IIP. Admittedly, a low base has played a significant role in showing relatively stronger growth for consumer goods — the segment had shrunk over much of 2014, but even with the wearing off of the base effect in December, consumer goods performance remains positive.

This then bodes well for industries that have a high consumption component. And a number of industries that have shown positive growth in sales in the second quarter are actually consumption driven — automobiles, gems and jewellery, food products, leather, wood products, among others. The case for increased consumption is further backed by related trends as well.

Urban consumption is expected to get a temporary boost in the forthcoming financial year on account of the implementation of the recommendations of the Seventh Pay Commission, continued rise in urban incomes on account of strength in the services sector and controlled inflation levels, which allow more broad based consumption.

Also, consumers continue to take personal loans at a fast pace. Personal loans grew by 16.1 per cent in December 2015, making it the fastest growing loans’ segment and also one that actually showed acceleration over the corresponding period of the previous year. Overall, bank credit growth had, in the opposite trend, showed a marginal deceleration of 0.3 percentage points to 9.2 per cent during the period. The softening of interest rates will provide further fuel to personal loans’ growth.

Largely positive outlook
At a macro level, optimism among industry houses is also improving, as indicated by a three-quarter high of the RBI’s Business Expectation Index for the current quarter (Q4 2015-16) to 114.2, even though optimism is a tad lower than that during the previous year.

This is further corroborated by the forecasts for 2016-17. Industry growth is expected to accelerate to 7.2 per cent during the year from 6.8 per cent, in line with an overall improvement in growth, as per RBI’s latest round of results of the survey of professional indicators for macro-economic indicators.

Further, capital spending by the Centre is likely to see an improvement in the forthcoming budget, in line with the government’s stated objectives of infrastructure creation and the need to rejuvenate the investment cycle. Not only does this positively impact industry directly, it also creates a second round impact for further growth in industry going forward.

Infrastructure spends, however, take time before effecting the economy in a sustainable manner. Combined with global sluggishness, that is impacting the export led industries as well as limited domestic impetus will, however, keep major core industries slow. In other words, we are not expecting a boom anytime soon, but we should expect growth in pockets.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Manika Premsingh

Economist and Founder, Orbis Economics

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