Manufacturing Outlook Remains in Expansion Mode for Q-3: FICCI Survey

Just days ahead of the Union Budget, FICCI’s latest quarterly survey on Manufacturing reveals that outlook seems to have improved for the sector in Q3 (October-December 2021-22) after some revival in the first half of 2021-22, and manufacturers are looking forward to the budget to enhance growth and investments in the sector. The percentage of respondents reporting higher production in third quarter of 2021-22 (October-December 2021-22) was above sixty percent mark- around 63%. This was significantly higher or almost double than the similar percentage of last year’s Q-3 quarter (around 33%), noted FICCI. This assessment is also reflective in order books as 61% of the respondents in October-December 2021-22 had higher number of orders vis-à-vis July-September 2021-22.

FICCI’s latest quarterly survey assessed the performance/sentiments of manufacturers for Q3 (October-December 2021-22) for twelve major sectors namely automotive, capital goods, cement, chemicals, fertilizers and pharmaceuticals, electronics & electricals, medical devices, metal & metal products, paper products, textiles, textiles machinery and miscellaneous. Responses have been drawn from over 300 manufacturing units from both large and SME segments with a combined annual turnover of over 2.7 lakh crore.

Capacity Addition & Utilization

• The existing average capacity utilization in manufacturing is somewhere in the range of 65-70%, which reflects the sustained economic activity in the sector.

• Nonetheless, cost of doing business remains a cause for concern for the sector. High raw material prices, high cost of finance, uncertainty of demand, shortage of working capital, high logistics cost, low domestic and global demand due to supply chain disruptions, excess capacities due to high volume of cheap imports into India, unstable market, high power tariff, are some of the major constraints which are affecting expansion plans of the respondents.

Inventories

• 75% of the respondents expect either more or same level of inventory in October-December 2021-22, which is lesser as compared to the previous quarter, where around 85% respondents expected either more or same level of inventory in Q2 2021-22.

Exports

• The outlook for exports continues to indicate the expansion path as around 50% of the participants are expecting a rise in their exports for Q-3 2021-22 vis a vis same quarter (Q-3 2020-21) last year.

Hiring

• Hiring outlook for the manufacturing sector remains subdued as around 75% of the respondents mentioned that they are not likely to hire additional workforce in the next three months.

Interest Rate

• Average interest rate paid by the manufacturers has reduced slightly to 8.4% p.a. as against 8.7% p.a. during last quarter and the highest rate remains as high as 15%. Highlighting the fact that the cuts in repo rate in the last few months by RBI has not led to a proportional reduction in the lending rate as reported by around 60% of the respondents.

Sectoral Growth

• Based on expectations in different sectors, half of the sectors are likely to register strong growth in Q-3 2021-22 except few as given in the table below.

Table: Growth expectations for Q-3 2021-22 compared with Q-3 2020-21

Note: Strong > 10%; 5% < Moderate < 10%; Low < 5%

Source: FICCI Survey

Production Cost

• The cost of production as a percentage of sales for manufacturers in the survey has risen for 81% respondents in the latest survey which is more or less the same as in previous survey (80% respondents). So, for both the quarters, this is considerably higher than that reported in Q4 2020- 21, where 72% respondents recorded increase in their production costs. This is pointing towards an increasing trend and impacting competitiveness in the short term.
• High raw material prices, increased transportation and logistics cost, and rise in the prices of diesel, LPG, natural gas, power, and fuel has been the main contributor of increasing cost of production. Other factors affecting the cost of production are increasing labor cost, short supply of raw material, high cost of carrying inventory, and fluctuation in the foreign exchange rate.