Large Scale Manufacturing (LSM) index jumped 14.5 percent in November 2020, arguably the fastest year-on-year growth ever. And with that growth the 5MFY21 number has landed at 7.4 percent, which is also among the best 5-month performance in the last ten years. Although LSM growth might not be as pronounced between December and February, it does seem now that the Planning Commission’s full year forecast of 2.5 percent LSM contraction is a huge underestimation.
Until October 2020, growth in LSM was led by handful of items tracked by the index, notably construction and cigarettes. The recovery had lacked the breadth one would have liked to see before shouting hooray. Come November 2020, breadth of recovery has expanded as is visible from the graph showing noticeable decrease in the number of items whose production has been contracted over last year.
It is true that only three items – cigarette, cooking oil and wheat & grain milling – have driven growth in ‘food, beverages and tobacco’ sub-sector, which has contributed the most to growth in LSM in November 2020. Equally true that if one also shaves off growth in cement production, overall LSM growth would be much lower; such is the lopsided nature of LSM growth so far.
However, the breadth of recovery has noticeably improved. In fact, the number of items reporting a decrease in production were the least in November 2020, helped in part by broad based recovery in pharmaceuticals and chemical industry.
As argued in BR Research’s earlier coverage, on aggregate basis the 1QFY21 signaled first decent growth after a hiatus of several quarters, leading to hope that the worst was probably over. With sugar output likely to be at least 10 percent higher this year, amid other drivers such as construction and auto sectors, overall LSM growth is likely to be much better than previously expected.
However, a much clearer picture would emerge when data for December to February is released, a period when growth may not be as visible due to higher base in that period. Might one remind that whilst all growth and contraction are mathematics, some are more mathematics than others – such as the case of growth in the ongoing year. Save for very few exceptions such as cement, average monthly production figures of most individual items tracked under the LSM index are still noticeably lower from monthly highs hit in different months of FY17 and FY18. Ergo, PTI politicians still need to keep their head down and keep working before calling hurrah.
Nevertheless, the substantial drop in base in March onward should mean that overall LSM growth for FY20 should still be north of 5 percent, unless of course the second wave of the pandemic strikes in a way it hasn’t yet. As for tracking the breadth of growth, and contribution of growth across various sectors, Pakistan Bureau of Statistics would do well to create and timely release new sub-indices. Something on the lines of CPI where core and trimmed core indices are presented that provide a picture cleansed of volatility and/or one-off variances, would not hurt for LSM either.