GST impact: Manufacturing at a nine-year low

First signs of GST’s impact on the Indian economy are negative. Manufacturing sector took a big hit in July, according to Economic Times, “mainly due to the rollout of GST at the beginning of the month (July).”

It is the sharpest contraction in manufacturing in nearly nine years, a survey points out. Companies are reported to have slowed down dispatches and have also cut down production in the run up to the GST, economists point out.

Except for car manufacturers, manufacturing contracted sharply almost in all sectors. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) data shows manufacturing at 47.9 in July, down from 50.9 in June, which is at its lowest mark since February 2009.

As opposed to all other sectors, car manufacturing witnessed a rise in July when the GST was implemented. It was due to price cuts announced by all major car brands due to tax cuts, as part of GST implementation.

Manufacturing slowdown was expected due to impact of the GST. But it is worrying from overall economic perspective as Indian economy has already witnessed slowing down in all of its eight core sectors. Economists had attributed it to the impact of demonetisation, which caused cash crunch in the market, affecting growth in all key sectors.

The GST came too soon after demonetisation, causing confusion among manufacturers, leading to massive production cuts as well as sales.

“No one had any understanding of how to go about the new tax phenomenon under the GST regime. Instinctively, businesses slowed down to watch the GST impact’’, a textile manufacturer from Surat told National Herald.

There was so much of confusion because of the GST in July that the textile industry in Surat shut shop completely and launched a massive protest against GST’s implementation. “Finance Minister Arun Jaitley gave us no time to understand the GST’’, said another major textile manufacturer from Surat.

Confusion due to the GST led to contraction in manufacturing and also in supplies as well as fresh orders that affected the economy.

A section of economists is worried about the overall growth of economy as a result of mega economic decisions like demonetisation and the GST, without much planning and understanding of their impact on the health of business and financial activity.