By Devanshee Dave

In July 2017, Indian manufacturing growth slumped down to 47.9, lowest since February. This is the result of demonetisation in November last year and the implementation of Goods and Service Tax in July this year.

Manufacturing growth versus GST

As per a report published by Pollyanna De Lima, an economist at IHS Markit, the Nikki India Manufacturing Purchasing Manager’s Index (PMI) has increased to 51.2 in August this year. De Lima said, “In July, firms indicated that orders, production and purchasing had been postponed due to a lack of clarity about the new tax regime, but they have now been resumed as manufacturers, suppliers and their clients have become more knowledgeable of the GST rates.”

However, in August, PMI improved as the ambiguousness in GST implementation was digested by manufacturers. Moreover, GST has reduced the stages of different central and state taxes, which makes the taxation less complex for manufacturers.

As per the report, the subsector capital goods have higher progress than consumer and intermediate goods. A PMI rating above 50 indicates expansion of the sector while a rating below 50 shows contrition. The Indian PMI measured in August was at 51.2, which shows a progress of manufacturing sector. The growth rate at the end of first quarter of the current financial year was down by 1.2% from 10.7% in the last year.

Bid to match Chinese growth

Along with India, IHS Markit also released a report on the growth of Chinese manufacturing market. The report places the Chinese PMI at a six months’ high at 51.6, which was 51.1 in July this year. Comparing the data, India, the world’s fourth fastest growing economy stands behind China by only 0.4 points. However, the difference lies in the stability of the growth rate. Chinese growth is stable with fewer fluctuations, whereas India has had a fluctuation of 3.30 points from July to August.

According to an article in The Indian Express, China has an export-based manufacturing setup and a strong domestic market. Nandan Nilekani, ex-chairman of the Unique Identification Authority of India (UIDAI) as well as Infosys, stated that India should focus on domestic consumption-led growth. Indian Prime Minister Narendra Modi’s ambitious project, Make in India, has created opportunities for domestic markets under the manufacturing policy. It provides finance, skill development, technology and infrastructure. It aims to increase the share of manufacturing sector in the country’s overall growth from 16% to 25% by 2022. Make in India policy also has a long-term goal of establishing India as a global manufacturing hub.

A positive outcome has been India’s increasing Foreign Direct Investment (FDI) in the form of capital investment. In this domain, India holds the top position in the world with $63 billion in 2016. Hence, slowly and steadily, India is moving ahead. As per PWC, by 2020, India would be the fifth largest manufacturing hub in the world.

Developing India, growing GDP

Only a day before PMI came the news of plummet in India’s GDP at 5.7% for the first quarter of this financial year—the lowest in three years. However, as per Rajiv Kumar, the new Vice President of Niti Aayog, the GDP is likely to rise between 7 to 7.5% in the second quarter. The good monsoon season and the post-GST effects will result in a hike in GDP. The implications of GST have already been witnessed on the PMI and the effects will be soon seen on the GDP as well.

Featured Image Source: Visual Hunt