Thu. Jan 21st, 2021

Indian manufacturing sector towards recovery mode as 2020 Q-2 performance improves; FICCI survey reveals

Indian Manufacturing Industry

Mahindra plant

FICCI’s latest quarterly survey on Manufacturing points towards the recovery of the manufacturing sector for Q-2 (July-September 2020-21) as compared to the previous quarter. The percentage of respondents reporting higher production in the second quarter of 2020-21 has increased vis-a-vis the Q-1 of 2020-21. The proportion of respondents reporting higher output during July-September 2020 rose to 24%, as compared to 10% in Q-1 of 2020-21. The percentage of respondents expecting low or the same production is 74% in Q-2 2020-21 which was 90% in Q-1 of 2020-21. The survey covered wide areas of relevance for manufacturing like exports, capacity utilization, ongoing restrictions, availability of labour/workforce and others. In many of these areas there are signs of operations inching towards normal and in coming months could see better performance.

Figure: % of Respondents Expecting Higher Production in the Quarter

vis-a-vis Respective Lst Year’s Quarter

Source FICCI Survey

FICCI’s latest quarterly survey assessed the sentiments of manufacturers for Q-2 (July-September 2020-21) for twelve major sectors namely automotive, capital goods, cement and ceramics, chemicals, fertilizers and pharmaceuticals, electronics & electricals, leather and footwear, medical devices, metal & metal products, paper products, textiles, textile machinery, and miscellaneous. Responses have been drawn from over 300 manufacturing units from both large and SME segments with a combined annual turnover of around Rs 3 lakh crore.

Capacity Addition & Utilization

  • The overall capacity utilization in manufacturing has witnessed a rise to 65% as compared to 61.5% in Q4 2019-20.
  • The future investment outlook, however, is subdued as only 18% of respondents reported plans for capacity additions for the next six months as compared to 22% in the previous quarter.
  • High raw material prices, high cost of finance, shortage of skilled labour and working capital, high logistics cost, low domestic and global demand due to imposition of lockdown across all countries to contain the spread of coronavirus, excess capacities due to high volume of cheap imports into India, lack of financial assistance, uncertain demand scenario across globe, complex procedures for obtaining environmental clearances, high power tariff, are some of the major constraints which are affecting expansion plans of the respondents.
  • From the table below, it is evident that the average capacity utilization for Q1 2020-21 has increased in sectors such as Automotive, Capital Goods, Metals & Metal Products, Electronics, Paper Products and Textiles.

 

Table: Average Capacity Utilization Levels as Reported in Survey (%)

Sector

Average Capacity Utilization in Q-1 2020-21

Average Capacity Utilization in Q-4 2019-20

Average Capacity Utilization in Q-3 2019-20

Average Capacity Utilization in Q-2 2019-20

Average Capacity Utilization in Q-1 2019-20

Average Capacity Utilization in Q-4 2018-19

Automotive

60

50

67

60

80

80

Capital Goods

64

53

67

72

76

            74

Cement and Ceramics

60

70

70

  73

80

80

Chemicals, Fertilizers & Pharmaceuticals

68

69

76

  84

76

77

Electronics & Electricals

66

60

67

74

67

72

Leather & Footwear

56

58

60

50

60

60

Medical Devices

70

70

70

70

70

NA

Metals & Metal Products

  75

73

80

  78

76

  88

Paper Products

60

55

90

88

95

95

Textiles

67

60

83

81

84

82

Textiles Machinery

50

53

67

60

60

60

Inventories

77% of the respondents had either more or the same level of inventory in July-September 2020, whereas around 74% of the respondents maintained either more or the same level of inventory in April?June quarter of 2020-21.

Exports

The percentage of respondents expecting an increase in exports in Q2 2020-21 has increased substantially to 24% when compared to Q1 2020-21, wherein merely 8% of respondents were expecting a rise in exports. Also, 19% are expecting exports to continue to be on the same path as that of the same quarter last year

Hiring

Hiring outlook for the sector, though bit improving, shows a bleak picture as 80% of the respondents mentioned that they are not likely to hire additional workforce in the next three months. This presents a slightly improved situation in the hiring scenario as compared to the previous quarter Q-1 of 2020-21, where 85% of the respondents were not in favour of hiring additional workforce.

Interest Rate

The average interest rate paid by the manufacturers has reduced slightly to 9.2% p.a. as against 9.4% p.a. during the last quarter and the highest rate is reported to be 12.5%. The recent cuts in the repo rate by RBI has not led to a consequential reduction in the lending rate as reported by 55% of the respondents.

 Sectoral Growth

Based on expectations in different sectors, all the sectors except Medical Devices are likely to register low growth in Q-2 2020-21. The primary reason for such depressed expectations seems to be the imposition of lockdown, subdued demand, restricted exports and other guidelines in place as a response towards COVID-19 outbreak. 

Table: Growth Assessment for Q-2 2020-21 compared with Q-2 2019-20

Sector

Growth Assessment

Medical Devices & Technologies

Strong

Chemicals, Fertilizers & Pharmaceuticals

Low

Cement & Ceramics

Low

Textile Machinery

Low

Textiles

Low

Electronics & Electricals

Low

Capital Goods

Low

Paper Products

Low

Automotive

Low

Metals and Metal Products

Low

Leather and Footwear

Low

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

Production Cost

  • The cost of production as a percentage of sales for manufacturers in the survey has risen by 70% of respondents. This is higher than that reported in the previous year, where 64% of respondents recorded an increase in their production costs. Industry respondents have attributed the hike in productions costs primarily to high fixed costs, higher overhead costs for ensuring safety protocols, a drastic reduction in volumes due to lockdown, lower capacity utilization, high freight charges and other logistic costs, increased cost of raw materials, power cost and high-interest rates.

Back to Business Scenario in Manufacturing (Unlock period)

  • As evident from the table below, Leather and Footwear & Textiles machinery sector is worst hit in terms of ongoing operations in the factories as per the demand and current orders post easing out of lockdown restrictions.

Operations taking place in facilities post easing of the Lockdown Restrictions

Sector

% of Active Operations

Chemicals, Fertilizers & Pharmaceuticals

76%

Cement & Ceramics

81%

Textile Machinery

46%

Textiles

68%

Electronics & Electricals

69%

Medical Devices & Technologies

63%

Capital Goods

69%

Paper Products

62%

Automotive

54%

Metals and Metal Products

68%

Leather and Footwear

46%

 

  • If one compares current percentage of active operations with the capacity utilization in Q-1, improvement is seen in many sectors like chemicals, cement, textiles, electronics etc.

Sector

Current % of Active Operations

Average Capacity Utilization in Q-1 2020-21

Chemicals, Fertilizers & Pharmaceuticals

76%

68

Cement & Ceramics

81%

60

Textile Machinery

46%

50

Textiles

68%

67

Electronics & Electricals

69%

66

Medical Devices & Technologies

63%

70

Capital Goods

69%

64

Paper Products

62%

60

Automotive

54%

60

Metals and Metal Products

68%

75

Leather and Footwear

46%

56

 

Workforce Availability

  • Below table highlights that sectors like leather and footwear have only half of the total labour force engaged in the operations and are hence facing a labour shortage. On the other hand, sectors like chemicals, Fertilizers & Pharmaceuticals witnessed as high as 88% workers attendance at factories.

 Workforce Engagement in Factories

Sector

% of workforce engaged in the current operations

Automotive

80%

Capital Goods

76%

Cement and Ceramics

  80%

Chemicals, Fertilizers & Pharmaceuticals

  88%

Electronics & Electricals

78%

Leather & Footwear

50%

Medical Devices

70%

Metals & Metal Products

   80%

Textiles

74%

Textiles Machinery

62%

Miscellaneous

73%

 Sourcing Strategies

While not all sectors indicated a change in their input sourcing strategies but there are plans to shift the sourcing of inputs away from a single country in certain areas like Automotive, Electronics & Electricals and textiles machinery.

Sector-wise plans to shift away from input sourcing from outside

Sector

Changes in Input Sourcing Strategies

Automotive

Around two-thirds of respondents indicated that they are planning to

change their raw material/input sourcing strategies.

Capital Goods

Not planning to change input sourcing strategy

Cement and Ceramics

Not planning to change input sourcing strategy

Chemicals, Fertilizers & Pharmaceuticals

Two-third of the respondents are not planning to change

their sourcing strategy

Electronics & Electricals

Around 60% of the respondents mentioned that they are

planning to change their raw material/input sourcing strategies.

Leather & Footwear

Two-third of respondents indicated that they are not planning  to

change their raw material/input sourcing strategies

Textiles

The majority are not planning to change input sourcing strategy

Textiles Machinery

Two-third of respondents indicated that they are planning

to change their raw material/input sourcing strategies.

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