By Priyanka Venkat
Industrial production forms the backbone of any economy, which is why its slackening growth in India is worrisome. The fall in industrial production is largely attributed to the disruption caused by the Goods and Services Tax, coupled with diminished lending and investment.
Industrial output growing at a slower rate
The Index of Industrial Production (IIP) indicates the status of production during a specific period. It shows whether there has been growth or contraction of industrial activity. Industrial production in September as per the Index of Industrial Production (IIP) grew at a rate of 3.8% compared to the previous year. Production growth, however, slowed down in September from 4.5%, which was a nine-month high, in August this year.
The main reason behind the slow down was fall in the production of consumer durables as well as a diminished performance of the manufacturing industry. Consumer durables production fell by 4.8% in September as compared to 1.6% the previous month. This is of concern, considering that production grew by 14% in September in 2016. Madan Sabnavis, Chief Economist at CARE ratings said- A major let-down has been consumer durables. Growth has not come as expected. If we want the overall growth to be in the range of 4-5%, then we need to see a substantial jump in October-November.”
A brighter future for the industrial sector
On a brighter note, the electricity, mining and manufacturing sectors have grown in September, in comparison to the same month last year. The mining industry grew at 7.9%, and both electricity generation and manufacturing rose by 3.4%. As compared to durables, consumer non- durables output grew by 10%. Production of capital goods also increased by 7.4%, which is indicative of a possible pick up in investment.
According to Aditi Nayar, Principal Economist at ICRA, it is possible that the industrial sector will recover in the second quarter of the financial year, bolstering a subsequent growth in the economy. She said, Based on the available data on industrial output and corporate earnings, we expect a broad-based recovery in the industrial sector in Q2 FY2018, relative to the performance in the previous quarter, which should support an improvement in GVA growth to around 6.3% in Q2 FY2018.”
GST relief measures for MSMEs could improve output
Micro, Small and Medium Enterprises (MSMEs) account for over 40% of the countrys industrial production and close to 45% of exports. The GST council in October announced measures that will help reduce costs for MSMEs through a simpler tax structure, consequently improving working capital conditions and competitiveness.
The introduction of GST in July hit the sector hard, affecting their ability to perform. The widespread confusion and anxiety regarding the implication of the tax rates for various products and the absence of the necessary IT infrastructure made it hard for the sector to thrive under the new tax regime. SME exporters faced a working capital crunch as GST impacted their liquidity needs.
Relief measures bring hope for a quick recovery
The new relief measures announced by the council includes an extension of the composition scheme under GST to small businesses with a turnover of up to 100 lakh from a previous threshold of 75 lakh. The scheme also allows for the payment of tax within a range of 1-5% without tedious formalities. Businesses with a turnover close to 150 lakhs have the option to pay tax under GST and file their tax returns on a quarterly basis, rather than on a monthly basis as followed previously.
Additionally, to address the working capital grievances of exporters, e- wallets are being created and will be operational from April 2018. Notional credit will be provided to the exporters as an advance in the wallet. They can pay their tax through the wallet, and the refund will automatically get offset in the wallet itself.
The simplified tax structure is likely to reduce costs and boost competitiveness, providing MSMEs with enough leeway to focus on production. The industrial sector is crucial to the survival of the Indian economy. It is therefore imperative that the government pulls all the stops necessary to bring about recovery in the sector.
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