De-stocking doesn't explain the Q1 fall in manufacturing GVA

Manufacturing companies excluding petroleum piled up inventories

by Mahesh Vyas

One of the reasons cited for real GDP growth slowing down in the first quarter of 2017-18 is that companies had slowed down production and preferred de-stocking in anticipation of the new goods and services tax that kicked in from July 1.

This is the reason why, it is said, that the growth in real GVA of the manufacturing sector fell from 10.7 per cent in the first quarter of 2016-17 to 1.2 per cent in the first quarter of 2017-18.

The biggest reason why the entire goods supply chain wanted to de-stock was that they could not claim hundred per cent input credit for the existing taxes (such as VAT and octroi) in the GST regime. For example, only 60 per cent of octroi expenses could be offset against GST. This created a disincentive for all participants in the supply chain to purchase new goods under the old tax regime that could not be sold within the old tax regime. They preferred to meet demand from stocks.

It became imperative to get rid of the old stock before the GST regime kicked in. Companies even announced discounts to facilitate the faster movement of inventories. De-stocking was therefore the buz in the market as GST came closer to reality in June.

But, its impact on quarterly financial statements (and therefore the GVA computations) would depend upon the magnitude.

Closing stocks usually account for about 12-13 days of daily sales. It follows that manufacturers would need to de-stock only these 12-13 days of sales worth of inventory. If they succeeded in doing so, sales would increase a little more than they would have normally and closing stocks would be correspondingly lower than the norm.

What do the data tell us?

First, there was no decline in the stocks of non-petroleum manufacturing companies. Note that petroleum products do not come under GST. So, the relevant set of companies to test the claim is non-petroleum manufacturing companies. Data for non-petroleum manufacturing companies do not support the claim that the fall in manufacturing sector’s GVA is because of de-stocking in anticipation of GST. Closing stock of these companies (sample size: 1,212 companies) increased by Rs.35,420 million in the quarter ended June 2017.

De-stocking is seen in petroleum companies. If we include these and take manufacturing companies as a whole, we do see a fall in stocks in the quarter ended June 2017. They were down Rs.73,507 million. But, this fall in inventories is not extraordinary. It is normal for stocks to rise and fall.

In fact, manufacturing companies as a whole have de-stocked after two quarters of stock-piling. And, non-petroleum manufacturing companies have continued to pile up stocks for the third consecutive quarter in June 2017.

The data does not show that they did de-stock in any extra-ordinary way.

And so, it would not be correct to attribute the fall in the manufacturing sector’s GVA to de-stocking on account of the introduction of goods and services tax.

Company financials show that volumes grew during the quarter. Nominal sales of manufacturing companies grew by 8.5 per cent. During the same period, WPI for manufacturing, which excludes petro, rose by 2.6 per cent. Real sales therefore grew at a reasonable rate of 5.85 per cent.

Thus, there was neither any production curtailment nor any drawing down of inventories during the June 2017 quarter.

CMIE STATISTICS
Unemployment Rate
Per cent
5.6 -0.0
Consumer Sentiments Index
Base September-December 2015
95.8 +0.4
Consumer Expectations Index
Base September-December 2015
93.9 +0.6
Current Economic Conditions Index
Base September-December 2015
98.7 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Dec 16 Mar 17 Jun 17 Sep 17
New projects 2.33 3.79 2.06 0.99
Completed projects 1.01 1.94 1.14 0.99
Stalled projects 1.13 0.70 2.66 0.64
Revived projects 0.18 0.67 0.30 0.22
Implementation stalled projects 0.82 0.33 0.67 0.61
Updated on: 19 Nov 2017 4:20PM
Quarterly Financials of Listed Companies
(% change) Dec 16 Mar 17 Jun 17 Sep 17
All listed Companies
 Income 6.2 10.2 9.9 8.6
 Expenses 6.3 11.9 10.1 9.9
 Net profit 40.3 15.7 -19.1 -17.9
 PAT margin (%) 6.1 6.0 5.4 6.0
 Count of Cos. 4,507 4,438 4,288 2,716
Non-financial Companies
 Income 5.9 11.8 10.6 8.6
 Expenses 7.2 15.6 10.8 8.6
 Net profit 24.5 -2.5 -24.4 -5.0
 PAT margin (%) 6.2 6.2 5.3 6.9
 Net fixed assets 6.9 10.0
 Current assets 2.6 2.1
 Current liabilities 8.8 9.9
 Borrowings 4.8 4.1
 Reserves & surplus 6.2 8.1
 Count of Cos. 3,488 3,439 3,340 1,982
Numbers are net of P&E
Updated on: 19 Nov 2017 4:29PM
Annual Financials of All Companies
(% change) FY14 FY15 FY16 FY17
All Companies
 Income 10.0 5.2 1.1 6.6
 Expenses 9.9 5.2 1.2 6.8
 Net profit -2.2 1.6 -12.9 20.2
 PAT margin (%) 3.2 3.2 2.9 6.5
 Assets 12.3 9.4 9.6 8.8
 Net worth 9.6 8.7 10.3 8.5
 RONW (%) 6.2 6.1 5.1 9.6
 Count of Cos. 23,895 23,579 20,184 3,629
Non-financial Companies
 Income 9.7 4.3 0.1 6.5
 Expenses 9.3 4.5 -0.6 7.4
 Net profit -2.7 -5.5 11.5 14.3
 PAT margin (%) 2.2 2.1 2.6 6.5
 Net fixed assets 11.6 13.4 15.1 7.3
 Net worth 8.2 7.1 10.6 7.2
 RONW (%) 5.1 4.9 5.4 11.0
 Debt / Equity (times) 1.1 1.1 1.1 0.6
 Interest cover (times) 2.0 1.9 2.0 3.7
 Net working capital cycle (days) 69 67 66 50
 Count of Cos. 19,154 19,053 16,707 2,782
Numbers are net of P&E
Updated on: 15 Nov 2017 2:29PM

Data added for HPI at Assessment prices and HPI at Market prices