An economy in pain: manufacturing decline proves India still needs time to recover

More pain ahead

The Bloomberg Commodity Index of 22 raw materials, rose 2.25% to 84.45 in the July-September quarter, while Brent crude oil witnessed a 20% rise in cost. Brent crude price is at a two year high now and is hovering above $60 a barrel indicating tougher times ahead for companies that use oil product as raw material.

Growth in the global economy, along with China’s crackdown on a capacity to clean up the environment, has led to an increase in prices of commodities and this is likely to keep situation difficult for those industries that are not in a position to increase prices.

Crisil Research has predicted a contraction of 100-150 basis points in Ebitda (earning before interest tax depreciation & amoritization) margin of Indian companies in the second quarter of the current fiscal.

All this does not bode well for the Indian manufacturing and private sector's ability to invest in the economy - something that the government needs to worry about.

The best season of the year has passed

It is believed that Indian economy can overcome any negative sentiment in the Diwali quarter of the year, as people take out cash to celebrate one of the biggest festivals of the year.

However, this year, the decline in manufacturing activity was witnessed in the month of Diwali, which is truly unprecedented. One can say that had it not been for Diwali, manufacturing activity would have registered contraction. Traders reported a decline of up to 70% in Diwali season sales and this has hit their capacity to stock their warehouses for the remaining part of the fiscal.

No breakthrough just yet

More so, Ease of Doing Business rankings and day-to-day changes in Goods and Services Tax (GST) rates won't help.

The government and its think tanks are arguing that the Indian economy is on the verge of a breakthrough; that the troubles introduced by the demonetisation and the teething issues of the GST regime are over. If such claims were indeed true, it would be based on some activity on ground.

However, neither consumers nor the industry are showing any confidence in their future. If the depressed sales during Diwali showcased a lack of consumer confidence in the government's tinkering with the GST rates announced in early October, the decline in investment proposals to a three-year low indicates that there is time before India celebrates breaking into the 100 club in the Ease of Doing Business rankings.

According to CMIE, “projects worth Rs 845 billion were proposed during the quarter ended September 2017. This is the lowest level of intentions to invest seen in a quarter during the tenure of the Modi government".

Given all the gloom that surrounds the economic activity in the economy, the only thing that looks glitzy is the all time high stock markets in the country. But it would do you well to remember that the highs of stock markets have nothing to do with activity on ground. It is not a surprise that this has made India the world’s most expensive market based on price-to-earnings ratio.

According to Economic Times, “The Sensex’s P/E ratio on a trailing basis is 24.53 times compared with 19.67 for the Dow Jones, 23.32 for the UK and 17.04 times for the Shanghai composite.”

Unless the fundamentals of the companies improve drastically in the coming months, this party is unlikely to last. The Modi government must do more to fix the economy before that happens.