The Outliers: Manufacturing Sectors That Have Defied The Slowdown
Amid everyday stories about a slowdown, some manufacturing industries have defied the gloom on the back of changing consumer preferences and continuing government spending. The outlook, however, is contingent on a broader pick-up in the economy.
The index of industrial production contracted 1.1 percent on a yearly basis in August. The index rose 2.4 percent from April to August and manufacturing—with the largest share in industrial activity—grew 2.1 percent.
Of the 23 industry groups in the sector, 14 contracted. But food products, wearing apparel, wood and basic metals—that make up about a fifth of the index—grew more than 10 percent during the period. The pace was even higher than in FY19 when these industries, except for basic metals, expanded in double digits.
Along with pharmaceuticals, these four components of the manufacturing index remained the fastest-growing industries in August. That came against a backdrop where GDP growth has dropped to its lowest in six years as everything from consumer goods volumes to car sales point to a slowing consumption in the economy.
Here’s why the four manufacturing sectors defied that slowdown:
Basic Metals, Wood
While the last fiscal year was subdued for basic metals, good end-user demand in the electrical industry is likely to have led to growth in the segment, said Urvisha H Jagasheth, research analyst at CARE Ratings Ltd. Increasing efforts to divert usage of scrap also helped make the industry more competitive, she said. Scrap is much cheaper and involves less processing in smelting because the ore is already broken down, Jagasheth said, adding that it’s a matter of refining the metal again.
According to Madan Sabnavis, chief economist at CARE Ratings, the growth in basic metals and wood was largely driven by the limited infrastructure work being undertaken by the government. The construction of roadways and railways and the government’s thrust on affordable housing continue to drive growth in these segments, he said.
Urban India has been driving demand for packaged food. A July research note by the U.S. Department of Agriculture called India’s food processing industry a sunrise sector.
“Industry sources estimate that over 400 million Indians regularly consume some type of processed food. Urban areas account for over 75 percent of sales, as consumers seek convenience and quality,” the note said. “For higher-value frozen and refrigerated foods, sales are almost exclusively in urban areas.”
Major products manufactured by the food-processing sector include milled grain, sugar, edible oils, beverages, and dairy products.
According to Sagar Kurade, former president of the All India Food Processors Association, urban Indians are choosing perception over reality. The consumer wants to be treated on a par with the global citizen, he said. In comparison, according to Kurade, rural India still relies largely on staples or sustenance products and they are still unlikely to have an appetite for coated popcorn or granola bars.
Moreover, these consumers tend to have lower incomes and a preference for fresh ingredients. Yet, rural areas are emerging as a market for well-priced, shelf-stable foods.
Like food, growth in apparel appears to be driven by rising aspirations and changing preferences of consumers, especially in large cities. Wearing apparel, despite a lower weight in the manufacturing index, is crucial for employment.
Domestic private consumption expenditure on clothing tripled at a compounded annual growth rate of 13.8 percent from FY10 to FY18, according to an April research report by CARE Ratings. Exports, the other segment of the industry, doubled— growing at a CAGR of 9.8 percent during the period.
The report attributed growth to rising per capita disposable income, changing fashion trends, a growing consumer class, rising urbanisation, increasing retail penetration and the growing share of designer wear. Here again, the metro market largely led the trend.
The metros contributed more than 20 percent to the Indian apparel market despite less than 20 percent of India’s population residing in these cities, indicating higher purchasing power and frequency of purchases, said the report.
Rural India appears to be catching up. Increasing purchasing capacity and awareness of fashion and trend in smaller cities has resulted in providing a huge market to the organised players, according to the report. High real estate costs, competition among branded players and saturation in metros have driven big brands towards smaller cities, it said.
Devendra Pant, chief economist at India Ratings, said it is likely that demand for apparel and food is also coming at the expense of pricing in the current economic situation.
Will Growth Sustain?
Despite higher relative growth in these segments, outlook remains subdued.
Basic metals find wide usage in automobiles, construction and consumer durables. All these sectors are seeing prolonged contraction amid slowing consumption in India.
Steel constitutes the prime share of metals in India. The World Steel Association is optimistic on steel demand. While the fiscal deficit might weigh on public investment to an extent, the wide range of continuing infrastructure projects is likely to support growth in steel demand above 7 percent in both 2019 and 2020, it said in its April outlook. In October, the association said the active infrastructure investment and a pickup in the automotive industry was expected to drive demand in 2020.
But Jayanta Roy, senior vice president and group head of corporate ratings at ICRA Ltd. remains cautious. While the alloy’s consumption grew about 7.9 and 7.5 percent in FY18 and FY19 respectively, this year growth is already lower at about 5 percent, he said.
For apparel, informal discussions with the industry indicate that the market is already in a stressed situation, according to Rahul Mehta, president of the Clothing Manufacturers Association of India. The uncertainty till elections and then the overall sentiment in the market has caused the slowdown, he said. Sales growth are running in the range of low to mid single digits, he said.
Though textiles and allied products contracted, apparel and clothing accessories saw a modest growth of 2.7 percent, Mehta said.