The inevitable has happened. Or better put, just starting to unfold, as the Large-Scale Manufacturing (LSM) index for July 2022 showed contraction of 1.4 percent year-on-year. This is the first time since the peak Covid quarter that LSM has entered the negative growth territory. The LSM had averaged 11.7 percent in FY22 – and there were enough signs emerging towards the end of the previous fiscal year, that the trend will soon be reversed. And it did not take long.

Mind you, the growth is based on revised LSM methodology and revised base of 2015-16, which includes export quantities of select items. The biggest weight among the newly added items is that of readymade garments, under the head of wearing apparel, which has continued to headline LSM growth. Readymade export quantity for July 2022 increased by 49 percent year-on-year, even though the dollar value was up only 16 percent, as the unit value continues to come down every month.

Readymade garments will hold LSM for at least another month, as August 2022 numbers show a growth in excess of 70 percent year-on-year. How long will the trend continue is anybody’s guess, but anecdote suggests that textile players have raised SOS calls, fearing slowdown in export as the West sits on the brink of recession.

Furniture with less than a million dollar in monthly exports and just 0.5 percent weight in LSM, contributed the second highest towards LSM growth in July 2022. Footballs and wood products have also held firm so far. But the real deal is with the categories that have continued in line with the previous base, with weight changes in some cases. That is where a broad-based decline in production has been witnessed across categories, with varying degrees.

Cement and tobacco sectors have led the way with the highest negative impact on LSM growth, with no more than 7 percent combined weight in the QIM computation. Textile and food sub-sectors have the highest and second-highest weights respectively, and the production slowdown may just have begun in these categories.

Reduced cotton supply, and supply chain disruption owing to floods in some of the key food inputs, is expected to dent the LSM growth further in the coming months. The demand disruption will also come into play, as interest rates remain high, inflation near record-highs, and currency depreciation taking a toll. Relatively high base will also mean it will be difficult for industries to arrest the slide in the next two quarters.