The Large Scale Manufacturing (LSM) numbers for July 2018 are out, and are nothing to write home about. At 0.5 percent year-on-year growth, the 1MFY19 numbers is the lowest since 1MFY15 – and considerably lower than the average 4.75 percent growth for July. This seems to be in the continuation of the downward trend that started in 2HFY18 – which led to a disappointing and below expectation full year FY18 LSM of 5.38 percent.
The growth drivers for LSM in FY18 were mainly cement, steel, automobiles, petroleum, and cigarettes. Nearly, all of them have faced a massive slowdown. The high base affect has surely come into play, as the signs were evident from 2HFY18. The performance of construction related activities owing to the CPEC and PSDP remained strong in the last few months, but that may all change soon, as the PSDP has been slashed by nearly one-third, and there are talks of ‘revisiting’ some CPEC project arrangements.
The textile sector, which has the single largest weight in the LSM index, showed negligible growth. On the bright side, the government has addressed a long standing demand of the textile players in the form of relief of Punjab based textile industry, which may come in handy in the upcoming peak demand season. Plus, the base is already low, which limits the downside. Unless the electricity prices go up significantly to undo the impact of gas price relief, the textile sector could be the one to carry LSM in FY19.
The automobile sector continues to show double digit growth, but it also suffers from the high base affect, and may struggle to repeat last year’s show. The fate of construction related sectors such as cement, steel and paints may also hang in balance, as the government’s austerity drive means a cutback on development expenditures.
Fertilizer production has shown some promise in August 2018, which will show positively in the next month’s numbers. Fertilizer plant shave been ensured of uninterrupted gas supply, which may reverse the negative growth trend in the sector. Petroleum sector growths, on the other hand, has remained stable, and better gross refining margins owing to increased oil prices, may keep the growth in tact.
The recent increased in duties and taxes on cigarettes may test the tobacco industry’s strength. Recall that the tobacco industry had benefited hugely from the crackdown on smuggled cigarettes in the country, but the growth faded towards the end of FY18.
All eyes will now be on the export oriented sectors to drive the LSM growth in FY19. In the first few days, there have been hints that the government is looking to offer favourable policies rather than ‘packages’ which bodes well for both the LSM growth and exports.
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