NEW DELHI (Commodity Online): India's manufacturing sector growth hovered close to zero for the first time since 1993-94 as the financial and economic crisis continued to impact major sectors although robust services secotr growth helped the economy maintain a growth of 6.7% in 2008-09 as against 9% in 2007-08, according to a Special Report issued by Standard Chartered Bank.
Strong domesitc orientation and an unintentional but timely fiscal response helped India weather the crisis, according to the report. However, government expenditure up by 26% and by 3.2% of GDP over FY08) on salary increases for public-sector employees, farm loan waivers, and oil subsidies (1.8% of GDP) ensured robust service-sector growth and thus helped put a floor under the economy, the report added.
India’s relatively better performance than its peers meant that activity levels resumed swiftly as global sentiment improved (in their respective worst quarters, India’s GDP growth was at 5.8%, China’s was 6.1%, Indonesia’s 4.4%, and the rest of the Asian economies contracted). The pace of the turnaround was not as spectacular as in some economies because India’s growth decline was limited. There are now signs of a revival in industrial activity. Following a contraction in Q4-FY09, industry grew by 3.7% in Q1-FY10, and the uptrend seems to be continuing – the monthly Index of Industrial Production (IIP) rise by 8.2% in June and 6.8% in July.
The consumer durables segment has shown a spectacular recovery. In the last five months it has grown by an average of 15%, compared with a meagre 0.5% for the preceding five-month period. However, this segment contributes only 5% of the overall IIP, and its impact is unlikely to be significant. Non-durables have been a laggard, with average growth for the last five months at -2%. Capital goods growth has been erratic, while the basic and intermediate goods sectors have been quite steady. The breadth of this recovery has been reasonably encouraging, with 15 of the 17 sub-sectors recording positive y/y growth in July. The 2.4% seasonally adjusted average m/m growth rate in the last three months indicates strong recovery momentum.
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Sectors such as cement, steel, coal, autos, and machinery equipment continue to perform well, and funding constraints have eased (though they are still not comfortable for smaller companies). Better-than-expected corporate results for Q1- FY10 reflected the improved conditions, and advance corporate-tax collection rose by almost 15% y/y in Q2-FY10.
Overall, business optimism has also improved considerably, according to the RBI Industrial Outlook survey.Gains from this industrial recovery were recently reflected in Q1-FY10 (April-June) GDP growth, at 6.1% y/y. However, the impact on GDP was not on a proportionate basis, as service-sector growth dipped below 8%, for the first time since 2004 on slower government expenditure. We do not interpret this as a result of the fading effect of fiscal stimulus.
Standard Chartered Bank expecs more government expenditure in the quarters ahead. Also, an improvement in the external situation by the last quarter of FY10 should help overall service-sector growth as trade, the financial sector, and tourism receive a boost, albeit at a very gradual pace. The telecom sector has weathered the storm
well, with growth in Q1-FY10 being higher than in the comparable period last year.
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