India’s daily power demand reflects the disruption caused by fears over transition to the newly implemented Goods and Services Tax that replaced multiple state and central levies.
The growth in power demand fell in June, revived in early July before dipping again, according to a research note by Neelkanth Mishra, managing director and India equity strategist at Credit Suisse.
From a peak of almost 3.6 billion units in May, the power demand declined to 3 billion units by the time the nationwide tax was rolled out on July 1. Companies had scheduled for production to restart after GST implementation and that may explain the pick-up in early July, the research note said.
Lower power demand showed up in manufacturing activity. It slowed in June on a lower growth in new orders as distributors cut stock ahead of the new tax, according to the Nikkei India Manufacturing PMI. The inventory of finished goods rose from a 21-month low in May but remained below the 50 threshold, Nomura said in a research note. Which implies, companies dipped into existing inventory to meet demand.
Credit Suisse’s channel checks, or third-party research on a firm’s business, revealed that some companies are considering holding lesser inventory even after GST.
While fewer inventory days implies improved efficiency as goods are sold faster, Credit Suisse cautioned that inventory depletion could negatively impact the GDP growth.
A six to seven-day reduction in inventory days means an approximately 2 percent cut in annual production, the note said. The phenomenon is unlikely to hold for all goods and won’t apply to services that contribute 54 percent of India’s GDP. However, it would add to uncertainty in the calculation of GDP as sales and service tax collections were used as a proxy for large parts of the GDP, which won’t be available from now, Credit Suisse said.
Data from the All India Organisation of Chemists and Druggists showed that the number of inventory days for pharmaceuticals dropped to 17 days by June-end from 41 days in April. Inventory days in the week after GST implementation remained largely the same implying that the “industry could have permanently adjusted to low inventory level”, said Mishra in his note.
Other Takeaways
- Havells India Ltd.’s trade channel too feels holding 45 days of sales as inventory is unnecessary.
- India's largest consumer goods maker Hindustan Unilever Ltd. said that several retailers were adjusting to the GST transition till the first half of July, and demand was disrupted. It expects a quarter or two for retail channels to normalise, the note said.
- Ultratech Cement said that after the GST implementation trucks were able to move around faster as octroi check-posts had been removed.
- Walmart noted a sharp increase in procurement by formally registered companies.
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