Rural distress harming MSMEs, pulling down manufacturing: Economists

Government's PLI schemes can help manufacturing and reduce import dependence in some sectors, say some experts

India’s manufacturing gross value added (GVA) declined in six out of 14 quarters since the economy started slowing down in 2019-20. This included a 4.3 per cent contraction in the second quarter of this financial year when the economy expanded 6.3 per cent.

Physical volume, as measured by the index of industrial production (IIP), fell as well in 14 out of 42 months over this period.

Does this mean that manufacturing has hit a structural issue or was it a blip in the second quarter when input prices increased due to external geopolitical conditions?

Pronab Sen, the former chief statistician, said manufacturing declined in the second quarter of FY'23 despite demand rising by almost 10 per cent. This pointed to a trend that demand is probably going to the services sector rather than manufacturing, he said. Contact services such as trade, hotels, transport rose by almost 15 per cent in the quarter.

As income distribution was skewed in favour of the rich, they probably demanded imported goods rather than domestic ones. The micro, small and medium sector (MSMEs) got a beating and that factor along with low demand in rural areas did not allow further units or full utilisation of the existing ones in the sector, he said.

While the government's production linked incentive (PLI) schemes are meant for big corporations, it would also help the auxiliary MSME sector. However, those MSMEs competing with large ones in the finished goods sector have been hit, Sen said.

In fact, the fast moving consumer goods (FMCG) industry has been complaining about the rural distress because of which companies are not performing well in villages, he said. Unless the woes of the rural sector are addressed, the manufacturing sector is not going to improve.

For instance, Dabur India’s Chief Executive Officer Mohit Malhotra had said last month he expects another quarter of rural pain. He had said recovery in the rural areas might come only next fiscal.

N R Bhanumurthy, vice-chancellor of the B R Ambedkar School of Economics University, attributed manufacturing woes to idle capacity since the economy slowed down even before Covid hit it in March 2020. External conditions which are slowing down the country’s merchandise exports has also contributed to this, besides rising interest rates and inflation, he said.

Madan Sabnavis, chief economist at Bank of Baroda, said manufacturing troubles have become a structural issue. "If consumption is not revived for them, it is a structural issue. This was a problem even before Covid," he said.

However, ICRA chief economist Aditi Nayar does not think that it is a structural issue. "In our assessment, the contraction in manufacturing GVA (in Q2 of FY'23) was accentuated by high input costs and the associated margin pressure," she said.

As commodity prices ease and volume growth revives, margin pressures should soften, she said adding PLI schemes can help manufacturing capabilities and reduce import dependence in some sectors.

However, Sabnavis said manufacturing value added will be low in the next quarter too and can improve in Q4. "It will improve once consumption revives and in real terms," he said.

Non-crop sector lifts farm GVA

 

The agriculture and allied sector has shown an impressive growth of 4.6 per cent in the second quarter of FY23, largely due to the performance of non-crop sectors that include horticulture, milk, meat, and eggs. This was despite preliminary first advance estimates that indicated a fall in farm production.

Also, in the case of livestock and allied sectors, the data collections aren’t very updated and robust, and production and price numbers come with a lag, that too from not very reliable sources.

When it comes to Kharif production,  the first advance estimate for 2022-23 (July-June), production of rice in the Kharif season is expected to be almost 6.05 per cent less at 104.99 million tonnes than 111.76 million tonnes in the same period last year.

If the numbers hold firm, then this will be the lowest rice production during Kharif season since the 2020-21 crop year.

Production is expected to be down due to drought-like conditions in the main growing regions of East India, namely UP, Bihar, Jharkhand, and West Bengal.

In other Kharif crops as per the first estimate, production of pulses is projected at 8.37 million tonnes — this is the same as last year.

Oilseeds output is estimated at 23.57 million tonnes, which is 1.29 per cent down from 23.88 million tonnes during last kharif. Sugarcane production is projected at 465.04 million tonnes, 7.69 per cent more than 431.81 million tonnes last year.

“We had done some back calculation a few months back and had found that allied sector growth has been more stable than the core crop sector. The Allied sector contributes around 45 per cent to the agriculture sector GVA which is a sizable share,” said a senior economist from a leading public sector bank.