Industrial Growth in pre- and post-COVID Regime in India

Mr. Panchanan Das
Professor of Economics,
University of Kolkata
Kolkata, West Bengal, India

Financial Blog in behalf of GLARiUS - wwww.glarius.com 

GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.

 

A deep decline of production of all industries as appeared during the lockdown of the domestic economy in the wake of the outbreak of COVID-19 witnesses a clear supply shock in the macro economy in India (Figures 1 and 2). The sharpest supply shock was witnessed during April, 2020, when the iip declined by more than 57 per cent for all industrial products. The highest decline was registered in motor vehicles (-99.6 per cent) and the lowest decline in food products industries (-24.6 per cent) during this month as compared to April, 2019. In use base classification, manufacturing of consumer durables was the worst affected sector showing -96 per cent growth followed by capital goods ( -92.6 per cent) and infrastructure (-84.7 per cent). De-growth of capital goods, and infrastructure goods is an indicative of fall in investment demand because of the pandemic. The decline of production of primary goods was the lowest (-26.6 per cent) in April, 2020. 

In the manufacturing sector, motor vehicles, furniture, machinery, electrical equipment, computers and electronics, fabricated metal products, wood, paper, leather, textiles, readymade garments, and beverages and tobacco contributed to approximately 40 per cent of the total fall of industrial output in April 2020 (Table 2, GOI: Macroeconomic Report, June 2020). Production of electricity declined by 23 per cent during this month despite it was exempt in the lock-down, may be because of fall in demand for power in the industrial sector.

Figure 1 Annual growth of industrial production by major sectors

 

Figure 2 Annual growth of industrial production by use base category

 

 

Average annual growth rates, calculated from iip new series (2011-12), before lockdown period and during lockdown period are displayed in Table 1. The period from April 2012 to February 2020 is treated here as pre-lockdown period and March to May, 2020 as the lockdown period. Industrial output grew at around 3.5 per cent (year on year basis) during pre-lockdown period, and the growth rate was declined to -36.9 per cent during lockdown (Table 1). Production of electricity exhibited the highest growth rate among different industry groups in the pre-lockdown period. Manufacturing production is the worst affected sector because of lockdown. In use base classification, production of consumer non-durable goods grew at the highest rate (5.2 per cent) per year during April 2012 to February 2020. Capital goods sector was the bad performer exhibiting negative growth even before the lockdown period. Mining and quarrying activities, were exempt during the lock-down, thereby entailing a relatively lower negative contribution. In lockdown, production of consumer durable goods and capital goods declined at significantly higher rates as compared to the other sectors in use base category in industrial production (Table 1).

 

Table 1 Average annual growth# rates of industrial production 

Industry group (sectoral division)	Pre-lockdown period*	Lockdown period**
Mining	1.24	-16.46
Manufacturing	3.64	-42.95
Electricity	6.18	-15.53
All industry	3.53	-36.88
Manufacturing group
Food products	3.36	-19.25
Beverages	1.67	-60.74
Tobacco products	1.33	-58.28
Textiles	2.14	-61.30
Wearing apparel	7.24	-58.71
Leather products	3.14	-57.89
Wood products	2.32	-63.73
Paper products	-0.58	-51.72
Printing	-0.44	-49.98
Petroleum products	3.18	-18.19
Chemicals	2.49	-33.09
Pharmaceutical	11.35	-24.65
Rubber and plastics products	0.61	-44.13
Non-metallic mineral products	2.93	-45.26
Basic metals	6.42	-44.91
Fabricated metal products	-0.18	-61.89
Computer and electronic products	6.64	-71.55
Electrical equipment	1.75	-65.80
Machinery and equipment	1.87	-63.41
Motor vehicles	1.13	-76.45
Other transport equipment	4.57	-64.97
Furniture	11.22	-55.89
Other manufacturing	-0.11	-65.37
Industry group (use based)
Primary goods	3.16	-16.91
Capital goods	-0.02	-65.07
Intermediate goods	4.44	-42.66
Infrastructure and construction goods	4.41	-50.65
Consumer durable goods	2.84	-66.98
Consumer non-durable goods	5.22	-26.87

 Note: #Growth rate,
* April 2012 to February 2020, ** March 2020 to May 2020

Source: Author’s estimation by using monthly iip 2011-12 series, NSO

 

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Manufacturing is the worst affected sector among different industrial sectors in India, but all manufacturing groups have not been affected equally because of the outbreak of COVID-19. The middle part of Table 1 compares average growth rates of production from different manufacturing groups at 2 digit NIC before lockdown and during lockdown period. Manufacturing of pharmaceuticals was the best performer among the 2 digit manufacturing groups followed by manufacture of furniture showing above 11 per cent growth rate before March 2020. However, some manufacturing groups like paper products, printing materials and fabricated metal products exhibited negative output growth during this period. Growth rate of output for every manufacturing group was negative during the lockdown. Production of motor vehicles declined at the fastest rate (more than 76 per cent) during lockdown period. Total sale of automobiles declined nearly to 0 in April 2020 and registration of motor vehicles declined by around 90 per cent in May, 2020 comparing to the same month in 2019 (GOI 2020, Macroeconomic Report June 2020).  Other manufacturing groups affected highly exhibiting de-growth at more than 60 per cent are computer and electronic products, electrical equipment, transport equipment, wood products, machinery and equipment, fabricated metal products and textiles in this period. Production of petroleum goods declined by 18 per cent during lockdown.

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Pandemic and Macroeconomic Outlook INDIA

Panchanan Das

Professor of Economics

Department of Economics

University of Kolkata (financial blog on behalf of GLARiUS – www.glarius.com)

GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.

The nature of recession today because of the outbreak of COVID-19 is completely different from that of the Great Recession of the 1930s. Macroeconomic risks brought on by the pandemic could be even more severe.There is a trade-off between the severity of the recession and the health consequences of the pandemic.The containment policies undertaken by the State in most of the countries including India in the form of economic lockdown primarily to maintain social distance exacerbate recession but raise welfare by reducing the probability of new infection and death toll caused by the pandemic.Different sectors of the economy will be affected adversely depending upon its intensity, spread and duration of the pandemic.

Till now, as the cost of externality is very high because of absence of vaccination and treatment of this disease, the State has to impose more aggressive policy in the form of near complete lockdown or in some cases complete lockdown of the economy to reduce the probability of being infected. Total number of infected people and number of death due to this disease is significantly less in India till now despite the country has the highest population density and more populous than USA and Italy. But,daily growth rate of infected people is significantly higher (above 10 per cent) than the rate even in USA (3.5 per cent) as on April 19, 2020. In India, although absolute number of death is the least compared to other countries, the death rate is larger than the rate in USA, the country showing the highest death toll in the pandemic.

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Global supply chains, trade, transport, tourism, and the hotel industry have been affected severely  because of the pandemic. The WTO (World Trade Organisation) indicated a declining trend in world trade volume in the early 2020, and is expected to be debilitated further by the adverse shock of the health crisis. The OECD (Organisation for Economic Cooperation and Development) estimates suggest that if the shutdown continues for three months with no offsetting measures, annual growth of global GDP could be between 4-6 percentage points lower than it otherwise might have been. In that case, the growth rate of real GDP would be negative for many countries during the post-pandemic regime. The IMF’s latest assessment is also roughly similar: global growth could be lower by 3 percentage points or more in 2020 relative to 2019 because of the outbreak of COVID-19 (IMF, 2020). The global economy is expected to collapse into greater recession in 2020. 

Indian economy, as for the economy of other countries, has experienced a significant structural break at the beginning of the last quarter of 2019-20 directly because of lockdown of the domestic economy and indirectly by the global recession because of the outbreak of the COVID-19 pandemic. Spill overs are also being transmitted through domestic and global financial markets. These effects would accentuate the growth slowdown which started since the first quarter of 2018-19 in India (Table 1).

Table 1 Quarterly growth rates of real GDP at market price

Components of GDP	2018-19				2019-20
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4*
Private final consumption expenditure	6.7	8.8	7	6.2	5	5.6	5.9	4.9
Government final consumption expenditure	8.5	10.8	7	14.4	8.8	13.2	11.8	4.9
Gross fixed capital formation	12.9	11.5	11.4	4.4	4.3	-4.1	-5.2	2.5
Exports	9.5	12.5	15.8	11.6	3.2	-2.1	-5.5	-2.8
Imports	5.9	18.7	10	0.8	2.1	-9.3	-11.2	-3
GDP at market prices	7.1	6.2	5.6	5.7	5.6	5.1	4.7	4.7

Note: Projected growth

Source: National Statistics Office

A sequential slowdown started in the Indian economy from first quarter of 2018-19 and the growth rate reached below 5 per cent in third quarter of 2019-20 (Table 1). The widening incidence of COVID-19 will produce the downward pull further. Private investment measured by gross fixed capital formation (GFCF) showed actual fall in the second quarter of 2019-20 and the rate of fall increased in the next quarter. Negative growth was observed in foreign trade (both exports and imports) during this period as well. The decline in merchandise exports started in second quarter of 2019-2020 because of the fall in shipment of engineering goods, gems and jewellery, cotton and handloom products. 

 Positive growth in aggregate demand is sustained by consumption demand driven mainly by the upward movement in government expenditure (GFCE). The slower growth of consumption expenditure on final goods by the households (PFCE) in 2019-20 as compared to previous financial year was caused by the deceleration in real wages and downturn in labour-intensive exports. Demand for consumer durables like small passenger vehicles continued to decline in February 2020. The rise in revenue expenditure partly due to pay hike by the 7^thPay Commission and decline in gross revenue under corporation tax deteriorated fiscal deficit of the central government during 2019-2020. 

On the supply side, the slowdown in growth of gross value added (GVA) was caused by the deceleration in industrial and services activities (Table 2). Agriculture and allied activities, on the other hand, accelerated in the second half of 2019-2020. Industrial deceleration led by the manufacturing sector deepened the slowdown because of low domestic and external demand. Services sector activities contributed the most to (GVA) although its growth rate declined in 2019-20. Agriculture and allied activities also provided momentum to some extent to GVA in second and third quarter of the past financial year. The industrial sector remained declining because of low demand conditions. 

Table 2Quarterly growth rates of real GVA at basic prices

Components of GVA	2018-19				2019-20
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4*
Agriculture, forestry and fishing	3.8	2.5	2	1.6	2.8	3.1	3.5	5
Industry	7.8	4.7	4.4	1.4	3.2	0.1	0.1	2.3
Mining and quarrying	-7.3	-7	-4.4	-4.8	4.7	0.2	3.2	2.6
Manufacturing	10.7	5.6	5.2	2.1	2.2	-0.4	-0.2	1.8
Electricity, gas, water supply and	7.9	9.9	9.5	5.5	8.8	3.9	-0.7	6.5
Services	7.3	7.2	7.3	8.3	6.7	6.8	6.4	6.1
Construction	6.4	5.2	6.6	6	5.5	2.9	0.3	3.2
Trade, hotels, transport, communication	8.5	7.8	7.8	6.9	5.7	5.8	5.9	5.1
Financial, real estate and professional services	6	6.5	6.5	8.7	6.9	7.1	7.3	8
Public administration, defence and other services	8.8	8.9	8.1	11.6	8.7	10.1	9.7	6.7
GVA at basic Prices	6.9	6.1	5.6	5.6	5.4	4.8	4.5	5

Note: Projected growth

Source: As for Table 1

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The lockdown of the domestic economy in the wake of the outbreak of COVID-19 has disrupted manufacturing activities which experienced negative growth just before the outbreak (Table 2). In the manufacturing sector, dislocations of labour adversely impacted automobiles, electronic goods and appliances, and apparel. Services such as trade, tourism, airlines, the hospitality sector and construction have been affected badly in a greater extent.

The conventional signals for forecasting are heavily conditioned by the depth, spread and duration of COVID-19 and other characteristics of the pandemic, and forecasting at this moment is really a challenging task(Ferguson et al. 2020). However, it could be easily understandable that the slowdown could be more long-drawn-out in the awful situation as the duration of COVID-19 extends longer. Different sectors of the economy will be affected adversely depending upon its intensity, spread and duration of the pandemic. According to World Bank’s estimate, the expected growth rate of India's economy would be around 2 per cent during 2020-21 fiscal year. Asian Development Bank has estimated that growth rate of India's economy reduced to 4 percent during this period. 

GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.