The confidence of manufacturing companies about the immediate future has sunk to its lowest level in the past five years — marking a significant draining of optimism at a time the Reserve Bank of India’s monetary policy committee has slashed the growth forecast for this fiscal to 6.1 per cent from 6.9 per cent.
Respondents to an industrial outlook survey carried out by the RBI have expressed deepening worries about rising cost pressures emanating from interest payments on borrowings, slump in order inflows and access to finance because of which they have become pessimistic about profit margins and have developed negative sentiments about selling prices.
The survey computes two indices — one based on assessment about the existing situation and is named the Business Assessment Index, and the other based on expectations to compute the Business Expectations Index.
Each indicator for the respective period is calculated as a weighted (share of gross value added, or GVA, of different industry groups) net response on nine business indicators.
The nine indicators considered are: (1) overall business situation; (2) production; (3) order books; (4) inventory of raw material; (5) finished goods inventory; (6) profit margins; (7) employment; (8) exports; and (9) capacity utilisation.
The two indices give a snapshot of the business outlook in every quarter and takes values between 0 and 200, with 100 being the threshold separating expansion from contraction.
On this basis, the Business Assessment Index has fallen sharply to 92.5 in the second quarter of this year (July-September) from 108.4 in the first quarter — effectively signalling that the sector has tumbled into contraction mode.
The survey, which polled responses from 481 companies, also shows that the forward-looking Business Expectations Index has edged down to 102.2 in Q3 of 2019-20 from 112.8 in the second quarter of 2019-20. Both indices are at their lowest levels since the first quarter of 2014-15.
The respondents have expressed subdued optimism in the third quarter on demand parameters such as production, order books, employment and exports.
Optimism on the overall financial situation moderated on account of muted sentiments on availability of finance. With moderation of optimism on selling prices and marginal edging up of cost of raw materials, manufacturers expect a downturn in profit margins in the third quarter.
In the case of the assessment period, the survey reveals negative net responses in 11 of the 17 parameters. The net response is the difference in percentage of the respondents reporting optimism and that reporting pessimism. The range is -100 to 100. A value greater than zero indicates expansion or optimism and a value less than zero indicates contraction or pessimism.
Significantly, when it came to the overall business situation, the net responses had tumbled to -0.8 per cent in the second quarter from a positive 24.6 per cent in the first quarter.
On the overall financial situation, companies came out with a grim response: the net responses sank to -1.1 per cent in the second quarter from a positive 21.1 per cent in the first quarter.
On profit margins, the net responses had tumbled to a negative 22.6 per cent in the second quarter from a negative 8 per cent in the first quarter.
Employment has been a big concern in the manufacturing sector and the survey reflects this. The net responses of the companies in the jobs parameter dipped significantly from a positive 8.6 per cent in the first quarter to a negative 0.9 per cent in the second quarter.
Other areas of concern where there was some muting of pessimism were cost of finance (net responses improving somewhat from a negative 17.6 per cent in the first quarter to a negative 13.1 per cent in the second quarter), and cost of raw materials (easing from -43.3 per cent to -35.3 per cent.)
Concerns about availability of finance — from internal accruals, banks and other sources, and from abroad — reflected a slight muting of optimism.
In the forward looking expectations survey, concerns centred on cost of raw materials (falling from -27.6 per cent in the second quarter to 30.8 per cent in the third quarter) and profit margin (significantly down from a positive 7.4 per cent to a negative 8.5 per cent).
As far as the overall business situation is concerned, fewer respondents were confident about the future: down from 35.2 per cent in the second quarter to 21.7 per cent in the third quarter.