LSM jitters

Rising inflation, rupee depreciation, higher interest rates, slipping FX reserves – and now a fall in Large Scale Manufacturing (LSM). The LSM index has posted its worst first quarter performance in recent memory, and contrary to the immediate perception, the decline in not entirely because of the high base affect in select few products, but also because of poor performance across industries tracked by the LSM.

For instance, textile the heaviest weighted sub-index of the LSM remained weak as usual. Growth in cotton yarn and cloth, the index drivers, remained damp, and no surprises there. The 8 percent fall in jute goods (1QFY18: 98% up), and 44 percent decline in ‘woolen & worsted cloth’ (1QFY18: 69% up), appear to be the major contributors in textile’s sub-par performance.

In the food, beverages, etc segment, the high base was that of cigarettes. But that has continued to grow, despite high base affect. The production of these cancer sticks had grown last year after the government undertook various policy actions. However, growth in this department will stabilize as the year progresses. The real drop in this segment came from fall in production of soft drinks, vegetable oil and a host of other items.

As far as oil is concerned, the LNG-furnace oil saga is already much discussed in this space, and therefore decline in petroleum sub-index doesn’t come as a surprise. In the auto sector, successive price increases amid rising cost of bank finance has applied brakes on auto growth. And it seems red light will remain on in the immediate future in that sector.

Until last year, steel had profited from increase in PSDP & CPEC led construction activities, growing auto demand, and anti-dumping duties slapped on finished steel products. The year so far has hit on local steel production as it has hit the cement industry which is also facing demand fatigue in the wake of the government’s decision to slash PSDP projects.

Each of these sectors have their unique reasons for the decline in production, but on the whole, it is a clear evidence that economic slowdown has arrived; something which was being expected since third quarter of FY18. But say what you will, PTI’s critics are going to have a field day with the graph that shows recent trends of LSM performance.

Can the PTI kick start broad-based LSM growth? Even if they can, it’s not happening any time soon, not before there is clarity on the economic stability front. When the market becomes rife with rumours that the PM lacks confidence on his finance minister and that the finance team is being told to find any other option but the IMF, then the market becomes jittery. The jitters affect day to day decisions, which in turn reflect on the LSM.