LSM: Green after a long time

The jinx is finally broken. After 13 long months of consecutive negative growth – the Large-Scale Manufacturing (LSM) managed to register 2.5 percent year-on-year growth for August 2023. Similar trend was also witnessed in cumulative LSM growth – that also made a returned to positive territory for the first time since June 2022. Needless to say – the base effect is now coming into play and should be the norm for much of FY24.

The cumulative index grew a meager 0.5 percent for Jul-Aug 2023. How far back the LSM fell is evident from the fact that the cumulative index reading is still shy of that for the two-month period of FY22. The signs of LSM hitting the bottom at the end of fiscal year 2023 were visible – and the low base was expected to be at the center of LSM recovery for much of FY24 – and it has started pretty much on the script.

The LSM composition has started to change drastically from the trend witnessed during much of FY23. August saw 10 out of the 23 broader LSM categories tracked by the PBS returning positive year-on-year cumulative growth for the period. The positive category wise growth before the beginning of FY24 was much confined to three to four sectors – mostly the newly inducted ones – representing export quantities in readymade garments, furniture and football. The notable additions to the green zone are food, cement, pharmaceuticals and petroleum products.

In the case of food, wheat and rice milling, having the largest weight in the sub-category maintained no growth – whereas the cooking oil and ghee segment has seen all-time high monthly values in the last few months – much higher from the long-term averages. The explanations are for the sector observers – but that surely has played a crucial part in the food sector entering positive territory after a long time.

In terms of impact to overall LSM growth – wearing apparel continues to be the leading contributor, true to the trend that started many a month ago. Explained many times earlier, wearing apparel tracks down readymade garment export quantities – which in August 2023 registered the highest monthly number. This trend though, will soon be arrested as the law of base effect works both ways. September 2023 export numbers are out – and readymade garment export quantities for 1QFY24 are up only 8 percent – a big downgrade from 36 percent growth recorded in Jul-Aug 2023. It is worth noting that the unit values have been lower year-on-year – as export value in dollars is down 11 percent in the same period.

Textile, with the highest LSM weight continues to be in the red, showing much slower recovery than other heavyweights. In the case of textile, the base effect has not come into play yet – as the real slide started from October 2023. With costs running high and earlier estimates of cotton crops being termed overly optimistic – the return to positive growth in the case of textiles may well be a slow-paced one.

Cement and pharmaceuticals are literally both rising from the ashes – and the strong growth for 2MFY24 tells this much. On a time, series – the monthly production values are still in the bottom two deciles over the past seven years. On the bright side, there is more upside for most sectors from here on – such as the likes of automobiles and two-wheelers. Mind you, the base effect has not much with automobile growth – as it continues to be painted red.

Of course, the much-altered interest rate environment, general inflation and purchasing power erosion ensure that low base alone won’t cut it for a few sectors.