LSM gathering steam

The LSM is back in action. After seeming to lose steam in September 2017, when the benchmark Large Scale Manufacturing index grew only 2.5 percent as against the 2MFY18 year-on-year growth of 11 percent, the LSM growth stood at a whopping 8.7 percent in October year-on-year. That is the highest growth October has witnessed in many years.

The drivers of incremental growth this month seem to be vegetable ghee, soft drink, electric motors, and TV sets, while growth in other sectors and items remains largely in line with the trends so far. The theme of the LSM growth, ergo, is much the same. Consumerism and construction related sectors are growing, whereas growth in export-oriented items – for example textile and footwear - is either negative or very low as against growth in import-oriented items - such as auto sector- which is much faster.

As this column has highlighted earlier, this year’s growth is reminiscent of FY14 when the clearance of circular debt and the ensuing increase in power supply had triggered production growth. If this trend continues, full year LSM can be expected to post a record growth, provided the heavy weighted petroleum products sector do not cause a lot of damage to LSM growth in Nov-Dec period.

Recall that in the recent LNG-furnace oil saga, a number of refineries had scaled down operations roughly beginning November 2017 to mid-December 2017. That will leave an adverse impact on the LSM numbers of November and December but not after, since production is likely to remain on track at least till the end of this fiscal year. The long-term outlook of this sector also hangs in balance LNG is eventually expected to replace furnace oil.

However, support from two sub-sectors is expected to become apparent when the LSM numbers for November-December period is released. The first is the nitrogen fertilizer sub-sector which is expected to show positive growth because the plants that witnessed earlier-than-usual maintenance shut down are due to resume production soon.

Second LSM trigger will come from growth in cotton yarn and cloth production. Channel checks suggest that following the notification of revised textile export package in late October, production in yarn and cloth has picked up pace. On balance, therefore, and considering that cotton yarn and cloth production have a combined weight of about 20 percent in the LSM, this year’s LSM growth will likely beat some records.