India’s Q2 mfg rebound puzzles economists

30 November, 2020 12:00 AM printer

NEW DELHI: The turnaround in India’s manufacturing sector, which rebounded from a 39.3 per cent contraction in GVA (gross value added) in the April-June quarter to clock 0.6 per cent growth in the second quarter, has left economists scrambling to reconcile conflicting data from the government as they try to come to terms with the latest GDP estimates that suggest the economy fared better-than-expected.

India’s GDP contracted by 7.5 per cent over the July-September period, as per official data released on Friday, beating most estimates, including a ‘nowcast’ in the RBI’s November monthly bulletin that projected an 8.6 per cent decline in the last quarter, report agencies.

While services continued to suffer from the COVID-19 pandemic’s impact, the industrial sector’s contraction narrowed to just 2.1 per cent in the second quarter, after shrinking by a steep 38 per cent in the preceding three-month period. Most of these gains were attributable to the improved performance of the manufacturing sector.

“Though the whole press release [on GDP estimates] is full of surprising numbers, the most astonishing number is the positive growth in manufacturing,” SBI group’s chief economic advisor Soumya Kanti Ghosh observed in a research report titled ‘Q2 GDP shows surprising resilience: Is it good enough to last?’. “Despite being the worst affected sector in Q1 due to the lockdown, it is quite puzzling how manufacturing turned itself around,” he wrote.

“The IIP manufacturing and manufacturing GVA growth are highly correlated [almost more than 0.90] and this correlation collapsed in Q2 when IIP manufacturing declined by 6.7 per cent [average of July, August and September] while manufacturing GVA grew by 0.6 per cent. This data requires proper explanation,” Mr. Ghosh wrote.

Aditi Nayar, principal economist at rating agency ICRA, urged caution on reading too much into the manufacturing sector recovery. “While manufacturing volumes had continued to contract, the GVA of this sector posted a marginal 0.6 per cent growth in Q2 FY2021, on the back of aggressive cost-cutting measures, a pared down wage bill and benign raw material costs,” she said.