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Exports, poor domestic demand dragging growth in manufacturing sector, says FICCI

New Delhi : The outlook for Indian manufacturing sector in Quarter 3 of 2015-16 looks to be weakening, as lesser percentage of respondents expect high growth to continue in Q-3 (October-December 2015-16).

The percentage of respondents expecting higher growth in Q-3 has gone down to 55 percent as compared to 63 percent for Q-2 (July-September 2015-16), according to a survey undertaken by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The survey had earlier indicated revival in the manufacturing activity in Q-2 of 2015-16, which seems to be slowing down little bit in Q-3 now. The outlook on the basis of FICCI Manufacturing Survey for Q-2 of 2015-16 was more optimistic than in the current quarter. Exports are primarily responsible for this less optimistic outlook besides domestic factors like poor demand conditions, high interest cost etc.

FICCI’s latest quarterly survey gauges the expectations of manufacturers for Q-3 (October-December, 2015-16) for twelve major sectors namely textiles, capital goods, metals, chemicals, cement and ceramics, electronics, auto, leather & footwear, machine tools, food, tyre, and textiles machinery.

Responses have been drawn from 336 manufacturing units from both large and SME segments with a combined annual turnover of over Rs.3.94 lakh crore.

In terms of order books, 44 percent respondents have reported higher order books for the quarter October-December 2015-16 which is almost the same as that of previous quarter, indicating a muted demand conditions, FICCI survey noted

The export outlook for manufacturing followed its trajectory downwards in Q-3 2015-16. The proportion of respondents expecting higher exports in Q-3 2015-16 is 24 percent as compared to 36 percent in Q-2 2015-16 and 33 percent in Q-1 2015-16. Though, the proportion of respondents expecting lower exports has also gone down from 43 percent in Q-2 of 2015-16 to 37 percent in Q-3 of 2015-16, but the scenario remains bleak as percentage of respondents expecting no change in their export level has also increased.

In terms of investment, for Q-3 2015-16, 68 percent respondents as against 73-75 percent respondents in earlier quarters reported that they don’t have any plans for capacity additions for the next six monthsimplying slack in the private sector investments in manufacturing to continue, even though there is a fall in the percentage of respondents not looking at fresh investments. Poor demand conditions, high cost of borrowing, delayed clearances and cost escalation are some of the major constraints which are still affecting the expansion plans of the respondents.

However, the current average capacity utilisation as reported in the survey is around 73 percent for Q-2 which is less than the capacity utilizations indicated in the previous two surveys i.e. Q-4 2014-15 and Q-3 2014-15 when it was around 77 percent.In some sectors, average capacity utilization has almost remained same in Q-2 of 2015-16 as was in Q-4 of 2014-15. These are sectors like auto, textiles and tyres. On the other hand, capacity utilization has improved in cement, food, capital goods and leather and footwear sector.

Inventory levels reflect poor demand conditions both in the economy and exports vis-a-vis last quarter as currently around 32 percent respondents reported that they are carrying more than their average inventory levels of finished goods as compared to 30% in earlier quarters. Another 56%are maintaining their average inventory levels which is slightly lower as compared to 59 percent of earlier quarter.

Hiring outlook seems pessimistic in coming months as around 76 percent respondents are not likely to hire additional workforce in next three months. On a broader scale, this proportion is slightly less than that of previous quarter (79 percent) but still remains too high to consider it as any improvement.

Interest rate paid by the manufacturers ranges from 8 to 18 percent as per the survey with average interest rate at around 11.8 percent per annum. Forty nine percent respondents reported availing credit at over 12 percent interest rates.

Based on expectations in different sectors, the Survey pointed out that ten out of twelve sectors were likely to witness low to moderate growth (less than 10 percent). Two sectors namely, capital goods and auto are likely to witness strong growth of over 10 percent in Q-3 2015-16.

The cost of production as a percentage of sales for product for manufacturers in the survey has increased vis-a-vis last year as over 50% respondents reported so. The primary reasons for this increased cost were devaluation in rupee and higher wage cost. (ANI)