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Confused industrial growth in the second quarter

By Ishita Misra

Ever since the Indian economy was hit by the storms of demonetisation and GST, policymakers have been striving towards reviving economic growth and getting the industrial production back on track. Unfortunately, even as the economy recovers from the impacts of demonetisation and implementation of a new tax regime, the direction of growth in industrial production still seems ambiguous.

A hint of recovery?

Net earnings of a sample of 1,455 Companies, excluding banking and financial institutions, was recorded in a study to measure the growth in industrial output for the second quarter after implementation of the new tax regime. According to the data, net profits rose by 2.5 percent on a year-on-year basis. In particular, the operating Profit grew by 10 percent year-on-year, a substantial increase when compared with the 7.8 percent increase in the last 3 months. The increase in profit hints towards a recovery in India Inc’s bottom line after the profits dropped by 14.6 percent in the June quarter as industries adjusted their production levels in anticipation of the new tax regime.

However, after including banking and finance firms, the sample of 1,844 companies reported a net growth in the sale of only 7.9 percent. Furthermore, net profit fell by 0.5 percent to accommodate the higher provisioning done by some of the banks considered in the sample. Nonetheless, the aggregate data points towards a healthy growth of the industrial sector.

Drastically different results

However, data from the sample might not convey a very accurate picture of the industrial growth in India. According to a report by CARE Ratings, firms have not adjusted to GST as quickly as it was hoped. As a result, the industrial growth been lower than expected and has caused the corporate profits to decline by about 1.5 percent during the second quarter. The report citing results from 1,241 companies said that the overall performance was largely driven by large companies that accounted for 71 percent of total net sales. It mentioned that these companies recorded negative growth in net profit of 7.4 percent in the second quarter in comparison to the 10.9 percent growth at the same time last year.

The agency also mentioned that even though the overall performance is being hampered by banks, oil companies, IT and finance due to other exogenous factors, the net earnings continue to depict a downward trend even after excluding these sectors. Moreover, the study by CARE Ratings also found that net sales growth slowed down to 7 percent from the 10 percent growth in the same period one year ago.

The answer lies in the sample

In both the studies, the sample could have highly influenced the results obtained by the study. In the first study, the increase in profits was mostly due to improved performance of businesses that are dependent on the consumption levels in the economy. Fortunately, as the cash crunch that was prevalent in the period following demonetisation has started to fade away, domestic consumption is again on the rise.

The companies that were able to capture the growing consumption momentum include those in the business of automobiles, consumer durables and nondurables, jewellery, and retail. The net profit recorded from a sample of 219 firms from these sectors showed a surge of 32.6 percent, the fastest growth in six quarters. Profit from these firms comprised 22.4 percent of the larger sample’s profit, resulting in the hike in net profit of all the net companies that were part of the sample.

Meanwhile, the results of the second study were highly influenced by the performance of large companies. The study also mentioned that companies with sales higher than Rs.500 crore and the ones below Rs.100 crore incurred a loss in profit on a year-on-year basis during the quarter.

Featured Image Source:  decafinata via Visual hunt / CC BY-SA

This post first appeared on The Indian Economist | For The Curious Mind, please read the originial post: here

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Confused industrial growth in the second quarter


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