The manufacturing segment in IIP index was 3.4% in September, 2017. The sector has recorded above 3% growth for two consecutive months, which was reeling under the implementation of GST in June and July. We should keep in mind that manufacturing in GVA term has recorded 1.2% growth in Q1, FY18 and impaired the growth rate of overall GDP. The manufacturing sector contributed 18% to the overall GDP and a weak performance of the sector weighs on the overall outlook of the economy. Therefore, rebound in manufacturing sector in IIP index gives a positive sign for healthy growth in GDP as well.

In a sub-sector level assessment, the growth in manufacturing is driven by petroleum refinery, machinery equipment, automobiles and food products. The major industries which recorded negative growths are textile, wearing & apparel, leather and electrical equipment. Textiles, including readymade garments, are crucial for the Indian economy in terms of employment and foreign exchange earnings. Currently, the segment is reeling under mild global demand and higher input costs. Moreover, being a high export intensive sector, appreciation of domestic currency is languishing in competitiveness. Cotton, a feedstock for the textile industry, witnessed 24% growth in price in H1, 2017. However, cotton price is expected to soften in the coming months.

Electrical equipment, another major sector, has been growing at a negative rate for the past 12 months. Capacity expansion in infrastructure, petroleum, power, steel, mining, automobile and consumer goods is an indicator of potential of this sector. However, this sector is facing tough competition from China. India annually imports around $2 billion from China, which is 32% of overall import of the sector. Moreover, most of the electronic goods come under the highest GST slab of 28%, which has now been revised to 18%.

SMERA believes that this industry has a pivotal role to play in Digital India and therefore this sector should be kept in the lowest slab. With 502.3 million telecom subscribers, tele density in rural India is only 56.8 at the end of August, 2017. On the other hand, tele density in urban area stands at 174. Availability of electronic goods at a cheaper price will help in promoting the Digital India initiative in rural areas.

YoY growth in major manufacturing industries in IIP:

Source: MOSPI, SMERA Knowledge Centre