By Priyanka Venkat
It is well-known that India’s manufacturing sector provides a massive impetus to economic growth. The sector has had a tough time though, grappling with subdued demand in the backdrop of the Goods and Services Tax. However, all is not lost yet. In November, manufacturing activity grew at its fastest in 13 months as per the Nikkei Purchasing Manager’s Index survey.
The Purchasing Manager’s Index (PMI) in November increased to 52.6 points from 50.3 in October. A Purchasing Manager’s Index indicates the level of business activity in the service and manufacturing sector. A figure above 50 signifies an expansion, and below 50 points to a contraction.
GST implementation poses a problem for the sector
India’s GDP in the April-June quarter fell to 5.7% as compared to 7.9% for the same period last year. The fall in GDP was mainly due to the slowdown in the manufacturing sector. The sector has been grappling with issues related to the implementation of GST since the beginning of the financial year. Large scale destocking of goods took place prior to implementation as a result of a negative outlook on the tax.
This means that businesses sold products from their existing inventories rather than producing newer ones. They did not restock because of widespread confusion regarding the implementation of the tax. The low confidence amongst producers coupled with a slower rate of orders, discouraged companies from producing more, thereby adversely affecting output. Technical issues also posed hurdles by disrupting the process of filing returns and availing input credit through refunds. Input credit refers to a refund of the tax paid on inputs such as raw materials to the manufacturer, when he pays taxes on his output.
Slashing of GST rates
Things are looking up for the sector, with the tax rates on about 200 items being slashed. The reduced tax rates came into effect on 15th November and the tax rate on 178 items was brought down to 18% from 28%. Over 50 items remained in the 28% slab as they belonged to the category of demerit goods. Demerit goods refer to those goods like alcohol and tobacco that are taxed higher to discourage individuals from consuming them. The cutting of tax rates was carried out to increase demand and ease worries about compliance costs.
The slashing of rates along with the increase in fresh orders including exports, has rekindled activity in the sector. Companies have started restocking their warehouses, indicating a recovery from the confusion created by the tax. Aashna Dodhia, an economist at IHS Markit, said that “Growth in output and new orders picked up the fastest since October 2016, reportedly supported by reductions in GST rates and stronger underlying demand conditions.”
A boost for the manufacturing sector
The rate of expansion of output has been the strongest since October last year. As per the PMI survey, the boost in production led to employment growing at its fastest pace since September 2012. The increased activity in the manufacturing sector has helped to improve the country’s GDP. India’s GDP grew to 6.3% at the end of the September quarter, from 5.7% the previous quarter.
There are concerns however, regarding the increase in input costs. Inflation of input costs grew at its fastest rate since April. This makes it more difficult for the RBI to issue a rate cut while reviewing the monetary policy on December 6, so as to not worsen the inflationary situation. Regardless, the sector seems to be making a comeback under the new tax regime, and exciting times may lie ahead for this industry.
Featured Image Source: Visual Hunt
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