Business Recorder (BR) Research
Amidst all the good news of late, the first sign that the economy is not performing as well as the government reports, is the slowdown in growth of the large-scale manufacturing (LSM) sector. The latest data released by PBS is that the LSM index has grown by only 2.6 percent year-to-year in January 2014. Compared to December 2013, the growth rate is a marginal 0.4 percent.
Why has the momentum disappeared from the manufacturing sector? The first reason is probably the large energy shortage, especially during the recently winter months. Second, exports are showing modest growth of about 3 percent, according to central bank’s figures.
The overall growth of manufacturing sector hinges crucially on the performance of textile industry, which has the largest weight of 30 percent in the LSM index and contributes over 53 percent to employment in the sector. Cotton yarn and cotton cloth production have grown by only 1 percent respectively. Unless these industries revive it is difficult to see the LSM sector grow at a fast rate in ongoing fiscal year.
Other industries that have performed poorly with negative growth rate include cigarettes (-12 percent), cars (-4 percent), footwear (-25 percent), vegetable ghee (-1 percent), petroleum refining (- 9 percent), TV sets (-5 percent) and tractors (-51 percent).
Industries that have shown high positive growth rates are urea fertilizer (17 percent), sugar (13 percent), billets (54 percent), tea (18 percent), beverages (33 percent) and air conditioners (137 percent). The production of cement has shown no growth.
The slowdown of manufacturing will have downstream implications on other sectors. The value added in the wholesale and retail trade sector is due almost 49 percent to trading in manufacturing goods. Similarly, transport volumes, especially in road transport, will also be affected.
It is clear that a return to high growth rate of the LSM sector will require, first, greater buoyancy of exports. The opportunity created by the granting of GSP+ by EU may be relatively difficult to avail now following the significant appreciation of the rupee. Second, priority will have to be given in allocations of gas and electricity to industry. Third, there is need to review the taxation policy in industries like cigarettes, cement, beverages and automobiles.
It may be argued that the cumulative growth in LSM from July 2013 to January 2014 is still high at 6 percent. But this is due largely to growth in sugar production of 36 percent, due to somewhat earlier commencement of cane crushing this season. But the cumulative growth rate has fallen from 6.8 percent in December, largely due to the decline in growth of sugar output from 78 percent up to December to 36 percent up to January. The artificial boost to overall LSM sector growth sector by the sugar industry is fading away rapidly.
Overall, there is growing evidence now that the manufacturing sector is not reviving as fast as was thought to be the case. This had been projected as a major area of success on the basis of a problematic measurement of growth rate. It appears now that for the year as a whole in FY14 the LSM sector will grow at 4 to 4.5 percent.
