Industrial recovery looks unconvincing

The ‘Make in India’ logo – a lion made up of four gears — reflects the integral role of manufacturing in the government’s vision.

On the face of it, the Prime Minister’s ‘Make in India’ programme efforts seem to be bearing fruit, with the latest data for Gross Value Added revealing a healthy 5.3 per cent growth of the manufacturing sector in constant terms in Q4 2016-17, even in the aftermath of the demonetisation. Meanwhile, the index of industrial production (IIP) data for April 2017 shows a marginal loss in momentum from 3.8 per cent in March 2017 to 3.1 per cent in April 2017.

An important source of data regarding the sentiments of the manufacturing sector, and one which provides forward-looking policy inputs for policymakers and businesses alike, is the Industrial Outlook Survey (IOS) conducted by the Reserve Bank of India. The Survey is considered to be closer to the ground, since it reflects business sentiments.

The results of the 77th Round of the IOS for Q4 2016-17, available in April 2017, paint an extremely optimistic picture of the state of the manufacturing sector — its performance and prospects — for both public and private limited companies. This seems to fit in with the current narrative of buoyant industrial growth, in spite of (or even because of) demonetisation drive. Is such optimism well-founded?

It is true that the IOS numbers for the 77th round i.e. Q4 2016-17, when compared to the previous quarter, Q3 2016-17 or even to four quarters back, . Q4 2015-16, present an overall optimistic picture. The sentiments regarding demand conditions seem to have improved, with respondents more optimistic about production, order books and capacity utilisation in Q4 2016-17 than a quarter or even four quarters ago.

The sentiments regarding exports and employment have improved marginally. The overall financial situation, the availability of finance from banks and other sources, as also the cost of finance for the manufacturing sector are also perceived to have improved.

As regards sentiments pertaining to profits, while respondents were slightly more optimistic than a quarter or four quarters ago about selling prices, they expected cost of raw materials to increase, thereby adversely affecting profit margins.

Overall, business sentiments in the Indian manufacturing sector improved marginally, with the Business Expectations Index (BEI) rising from 104 in Q4 2015-16 and 101.1 in Q3 2016-17 to 106.0 in Q4 2016-17.

However, the picture presents a sharp contrast to business sentiments in 2010-11 or even in 2014-15 — the year of the new government and the launch of the ‘Make in India’ programme. In Q4 2016-17, the business confidence captured by the ‘Business Expectations Index’ is significantly lower than the 2010-11 level of almost 120, and only 0.3 points more than in 2014-15. It appears that the ‘animal spirits’ required for significant investments in the economy, after dropping significantly since the new government took over in 2014, is only now catching up (Table 1).

And what of expectations regarding future production and employment? Most trends point to a contraction in the manufacturing sector since 2010-11. Thus, with expectations of increase in order books going down from 46.5 per cent in 2010-11 to 38.3 per cent in 2014-15 and further down to 35.1 per cent in Q4 2016-17, it appears that sentiments regarding production have become worse since 2010-11. This has manifested itself in a lowered expectation regarding employment outlook as well, which has declined since 2010-11 by more than 10 percentage points, from 22.7 per cent to 12.1 per cent in Q4 2016-17.

While the industrial outlook has shown an overall contraction since 2010-11, micro enterprises seem to be faring worse. Even in June 2016, a relatively normal quarter, the sentiments for production among micro enterprises were seen to have followed a downward trend since Q4 2013-14 “which finally entered into the contraction zone in Q2 2015-16”. A similar contractionary pattern was observed for other demand indicators such as capacity utilisation and order books, as also pessimistic sentiments regarding availability of finance.

While the 78th round of the Industrial Outlook Survey is awaited, the writing on the wall is clear: Make in India will remain a pipe dream in an environment of low animal spirits.

The writer is a professor of economics at SPJIMR, Mumbai. The views are personal.