Wednesday, February 23, 2022 / 11:25 AM / by CSL Research / Header Image Credit: Times of India

As expected, analysis of the Q4 2021 GDP report showed the manufacturing sector real GDP closed the year positive, rising by 3.35% y/y in 2021 from a contraction of 2.75% y/y in 2020. The sector has shown positive growth since the start of 2021, benefitting from the low base in the prior year, also benefitting from a boom in local demand and the continued interventions given to critical sectors of the economy by the monetary authority. Also, the readings for Manufacturing PMI rose to 52.0 index points in December 2021, above the 50- index point benchmark and a better outturn when compared with 49.6 points in December 2020. Across the subsectors that make up the manufacturing sector, we observed that the negative impact of the oil refining subsector has continued to drag performance in the manufacturing sector with consolidated refining capacity at zero levels.

When the pandemic struck without warning, the impact negatively affected manufacturing activities, with Manufacturing GDP touching a low of -8.78% in Q2 2020. This, coupled with existing structural bottlenecks, forced many businesses out of operations. Several companies saw demand for their goods plummet on the back of movement restrictions, and consumer behaviour turned towards the search for essential items. However, since the reopening of the economy, we believe gains from exports via open borders and increased credit supply to manufacturing businesses cut the sector some slack from the harsh effects of the pandemic.

In recent times, conversations around the manufacturing sector have been in the spotlight, receiving much attention from the government on improving the state of conditions of the sector. From the 100 for 100 Policy for Production and Productivity (PPP) to the highly ambitious RT200 FX programme, and a new FX bidding regime, which theoretically should keep the sector afloat since sourcing FX timely has been a major bottleneck. However, pending the time FX clarity is achieved, the existing FX constraints, supply chain disruptions and weak disposable income are all factors that will continue to undermine growth in the sector. The need to boost the manufacturing sector is pertinent to achieving the country's output projection, and if structural constraints remain unaddressed, growth in the sector will remain lacklustre.