The Central Statistical Office (CSO) expects 7.6% GDP growth at market prices during 2015-16; it shows a 33 basis points improvement in the growth compared to 2014-15.The CSO also expects India’s Gross Value Added (GVA) at 2011-12 prices to grow by 7.3 percent during Q3:2015-16. This is tad higher than the 7.1 percent growth estimated for the preceding year and this will be highest in five years.
The growth will be driven by a 9.5 percent increase in GVA of the manufacturing sector, which is estimated to have grown by a modest rate of 5.5 percent in the preceding year. The CSO also expects the agriculture, forestry & fishing sector to return to growth in 2015-16 with 1.1 percent increase in GVA, after registering a negative growth of 0.2 percent in 2014-15.
But this number of expected 7.6 percent growth is difficult to believe. Take the case of the manufacturing sector which is expected to grow at 9.5% during the course of this financial year, after growing at 5.1% in 2014-2015.
The obvious fact is that, if the manufacturing sector is growing such a fast pace, why are businessmen increasingly demanding sops from the government is a question worth asking. But businessmen always demand sops-it’s a part of what they do, you might tell me, dear reader.
For instance look at data, which clearly shows that the manufacturing sector cannot grow at 9.5 percent during 2015-16, as anticipated by CSO. The RBI publishes the Order Books, Inventories and Capacity Utilization Survey (OBICUS) data for every three months. The data captures actual data from the companies in the manufacturing sector.
The latest data of RBI shows that all 1,104 manufacturing companies responded shows that for raw materials and finished goods, and capacity utilization are received from a common set of companies. Hence, it reflects the real state of manufacturing sector. And things are not clearly looking good when we look at the capacity utilization data.
As can be seen from the data, at the aggregate level, Capacity Utilization recorded fractional decline to 70.6 during the period July to September 2015 from 71.3 percent over previous quarter period of April to June 2015; it was also lower than the level during the same quarter of the previous year of 73.6 percent. This is the second lowest number since April 2012.
Hence, manufacturing companies have been using a little more than two-thirds of their capacity to manufacture. Then how CSO can expect manufacturing growing during 2015-16 be at 9.5 percent, when the first of half of the year, the capacity utilization has been very low. How manufacturing sector can is utilizing lesser production capacity than before is growing at 9.5%. It is prudent to left to CSO to explain in this instance.
Now look at the data on the finished goods inventory to sales ratio (FGI/S) remained steady with 20.5 percent in Q2:2015-16 over the previous Q1:2015-16 with 20.3 percent. The raw material inventory to sales ratio (RMI/S) increased to 23.9 percent in Q2:2015-16 and stood at a higher level as compared to the level observed with 23.2 percent in Q2:2014-15.
What does this tell us? The finished goods inventory to sales ratio has been going up over the last few quarters. What does this mean? It means companies are not able to sell the goods that they have been producing at the same pace as they had in the past, leading an increase in inventory. This shows a slowdown in consumer demand.
While, the raw material inventory to sales ratio has also started to go up. What does this mean? It means that the inventory of the raw materials used to manufacture goods has been going up. This is but natural given that the companies haven’t been able to sell their finished goods at the same pace as they had been doing in the past.
If goods don’t sell, it is but natural that the raw materials inventory will go up immediately, as companies will manufacture lesser stuff. This also explains why the capacity utilization rate has been falling.
The company generally receives new orders, on this parameter the average new orders grew marginally in Q2:2015-16 from its level of previous quarter. However, it remained unchanged from its level a year ago. It means that the manufacturing sector cannot possibly grow by 9.5% during 2015-16.
The other evidence is that any growth in manufacturing would be accompanied by a growth in electricity demand and railway freight movement. The demand for electricity between April –December,2015 has gone up by 2.6% in comparison to Apri-December,2014. Revenue earning Railway freight has gone up 1% during the course of this financial year, in comparison to a year earlier.
The inescapable evidence is that manufacturing of goods need electricity and it also needs raw materials, which are ultimately moved by Railways, but the growth both in these two parameters has been marginal, then how is manufacturing expected to grow at 9.5%, as manufacturing constitutes 17.2% of the economy.
This is also corroborated by RBI’s latest monetary policy statement “ Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening the export growth could act as headwinds”.
Even, the financial, real estate and professional service sectors which constitute 22.3% of the overall economy, is expected to grow at 10.3% during 2015-16 as against 11.1% during 2014-15. How this growth is achieved is a billion dollar question, as the real estate sector in large parts of the country continues remain in mess and bad loans of banks are amounting at a very rapid pace.
In case of agriculture and allied sector continues to see almost no growth at 1.1 against 0.2% in 2014-15. Moreover, this sector during the period of Q3;2015-16 actually contracted by 1%.
In fact, the non-agriculture economy is expected to grow at 8.5% in 2015-16 is fantastic growth. But if government thinks of increasing its expenditure and push up the fiscal deficit, then they do not believe their own economic growth data. Long story short-it is very difficult to believe the economic growth data put out by the CSO.
Suggestions have been made in the recent past that the government needs to spend more money in order to ensure that the economic growth picks up. Nevertheless, at 7.6% India is the fastest growing major economy in the world. And why does the fastest growing economy in the world, need an economic stimulus, is a question worth asking put forth by economists?
By G.Rajendra Kumar