A considerable 4.3% growth was noted in Index of Industrial Production (IIP) for the month of August.
But the effect of demonetisation - which has dramatically ruptured domestic supply chains, still looms large.
While demand was partially restored with remonetisation, it is increasingly being met by imports.
GST related disruptions have indeed compounded these woes.
Is the Current Growth in Industrial Output Sustainable?
In the months preceding GST, businesses resorted to selling from their inventories rather than purchasing new goods.
This was because tax credit on state VAT can’t be claimed once GST sets in.
The manufacturers were therefore forced to cutting output in June due to lack of demand.
Uncertainty around the new tax regime meant that July’s production was also low.
Full production resumed only in August, which would have mainly gone to restock depleted warehouses for the festival season.
The fact that, the overall industrial output fell by 0.2% in June and went up marginally by 0.9% in the July, before recovering to 4.3% in August – seemingly confirming this hypothesis.
But restocking alone, which is a one-time affair, can’t sustain a recovery in the months ahead.
How does the manufacturing sector look?
Manufacturing sector accounts for 77.6% weight within the IIP.
This registered a mere 3.1% annual growth in August.
Out of its 23 subsectors, as many as 13 posted negative growth.
This includes textiles, leather, rubber, plastics, chemicals, paper and furniture - most of which are employment intensive industries.
What really is moving?
Manufacturing growth since February 2016 shows a clear trend of decline which is particularly visible after demonetisation.
While the nine months before demonetisation saw an average year-on-year growth of 5.8%, it fell to 1.7% for the nine months after it.
The corresponding growth rates for non-oil imports over the same period were quite the opposite.
Imports for the nine months after demonetisation grew at an average 21.3%, whereas it was minus 8.5% for the 6 months prior to demonetisation.
What do these trends indicate?
Domestic manufacturing has clearly been hit from the twin blows of demonetisation and GST, one following the other.
Small & medium-sized enterprises (SMEs) in manufacturing clusters, paying workers mostly in cash, were the worst affected.
By the time liquidity returned to the system around March many domestic manufacturing units, had significantly cut production.
So, whatever demand was restored was increasingly being supplied not by domestic production, but imports.
How does the future look?
Import rising by over 20% in an economy combating a severe growth and investment slowdown is quite unusual.
This will affect both the current account deficit and jobs in India.
For reducing imports, rebuilding of broken domestic supply chains is needed.
This will involve either the SMEs adjusting to the new tax regime or the formal sector taking up the space ceded – both of which will take time.
Without manufacturing bouncing back and the capital expenditure cycle resuming, there can be no recovery.
