Everything about Industrial Revival

Earlier slowdown in industrial growth:
  • The November 2016 demonetisation had a major impact on industrial activity.
  • For example, growth in the IIP was a relatively robust 5% in November 2016, but slowed to 1.2% by February 2017.
  • Activity resumed thereafter, but was hit again by the prospect of the Goods and Services Tax and then its fallout.
  • Industrial activity contracted in June because firms halted production to get rid of their stock in preparation for the GST, which rolled out on July 1, 2017.
  • Similarly, July, 2017 saw only 1% growth as companies came to terms with the new tax regime.
Recent Industrial Revival:
  • Industrial activity, as measured by the government’s Index of Industrial Production (IIP) and the private sector Purchasing Managers’ Index (PMI), has improved significantly over the last two months.
  • While the IIP is an output measure, the PMI is an indication of the activity at the input, or purchasing, level.
  • IIP: Growth in the IIP soared to 8.8% in November, 2017, the highest since October 2015, and stood at a slightly slower but still robust 7.07% in December, 2017.
  • These two instances mark a return to above 5% growth after a year.
  • Within the IIP, growth was largely driven by the manufacturing sector, which grew 10.7% and 8.4% in November and December respectively.
  • PMI: Similarly, the PMI surged to a 60-month high of 54.7 in December, 2017 and came in at 52.4 in January, 2018.
  • These two sets of data are interesting because not only do they show the picture from both the government and private sector sides but also highlight different elements of the sectors they measure.
  • If both show strong growth, the implication is an overall recovery in industrial activity and sentiments.
Causes for revival:

  • A combination of the impending festive season and the re-stocking of inventory led companies to increase their activity thereafter.
  • The recovering global economy boosting exports further propelled industrial growth in November and December, 2018.
  • There were other factors at play, such as
  • Companies getting increasingly comfortable with the GST regime
  • The government taking steps to ease the woes of exporters who saw a large chunk of their working capital tied up because of the input tax credit system
  • Domestic demand recovering somewhat
  • Government investing heavily in roads
Significance of the revival:
  • The recovery in manufacturing and in the overall industrial sector comes as much relief.
  • Economic growth itself is expected to increase, and already showing signs of a recovery.
  • With economic growth should come job creation that is needed.
However informal sector revival is unclear:
  • The IIP and the PMI measure only the formal sector.
  • Several accounts say the informal sector, a very large segment of the economy that accounts for significant employment, is still recovering from the effects of demonetisation.
  • That effect has not been effectively measured, and any talk of a recovery leaves the informal sector out.
Way ahead:
  • A significant part of the recovery is based on how the global economy does.
  • Any dip there will have a detrimental effect on India’s exports which, in turn, will dampen industrial growth