Most companies expect manufacturing growth to moderate in the second quarter of this financial year, according to a survey by the Federation of Indian Chambers of Commerce and Industry.
The chamber showcased the findings to substantiate its appeal to the Reserve Bank of India not to raise policy rates any further.
The survey drew responses from 324 manufacturing units and showed that 74 per cent of all respondents expected growth to slow down in their sectors in July-September, as compared to the corresponding period last year.
The Survey showed seven of 12 sectors were likely to witness a low to moderate growth of less than 10 per cent in the second quarter, compared to the corresponding period of 2010-11. These are consumer durables, cement, steel, textiles, chemicals, capital goods and tyres. Automotibiles, auto components, leather and food processing are likely to witness strong growth of more than 10 per cent in the period.
| EXPECTATION FOR Q2 2011-12 VIS-A-VIS 2010-11 | |
| Sector | Growth |
Source: FICCI Survey
Cost rises
Respondents said the two most important factors for moderation in growth were the rise in the cost of capital and raw materials. Nearly 75 per cent felt the rise in policy rates had a significant impact on their cost of borrowing. Ficci noted the weighted average base rate of banks was expected to cross the 10 per cent mark for the first time, as a result of the tight monetary policy.
Feedstock linkage is turning out to be another block in the growth of manufacturing. Growth in the coal sector was negative last year and there are at least coal mining projects awaiting approval, both at the state and the central level. Unless these were granted fast-track clearances, lack of availability would further affect the growth of manufacturing, the chamber said.
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Ficci reiterated its appeal to RBI not to increase rates any further, as it would directly impact capacity additions and growth. It also recently wrote to the Prime Minister about the current state of manufacturing and requested him to boost investors’ confidence in the sector by announcing the proposed National Manufacturing Policy. In fact, except exports, on all other parameters like new investments, capacity utilisation and employment, the indices had seen a decline over recent quarters, revealed the survey.
The respondents said there’d be a significant change in the demand conditions for the manufacturing sector in the second quarter, compared to previous quarters. A significant fall in the order books is seen. In the past two quarters (April-June and January-March), a little over half the respondents reported higher orders, compared to the previous. However, in the July-September period, only 38 per cent said they’d higher orders than the earlier one of April-June.
"The situation is indeed serious and unless corrective measures are not taken to reverse this trend, we may see an impact on employment," said Ficci.
More idle capacity
This worsening of demand is also reflected in the fact that in June, growth of consumer goods had slowed tremendously to 1.6 per cent, the second lowest growth since October 2009. The survey found a significant fall in the capacity utilisation in the second quarter, as only 36 per cent of respondents said their capacity utilisation levels were higher as compared to the corresponding period last year. In the previous quarters, 53 per cent of respondents reported they were operating at higher capacities vis-à-vis last year. Capacity utilisation levels are particularly low in textiles, consumer electronics and the electrical sector.
While in the previous quarter, about 52 per cent of respondents had plans of capacity additions in the next six months, in the latest survey, only 41 per cent respondents said they’d plans for such additions in the next six months. Sectors where a majority of the respondents reported that capacity additions were not coming through are textiles, steel, capital goods, cement, electrical and consumer electronics. In other sectors, such as automobiles, auto components, chemicals and leather, there is going to be a moderate increase in capacities.
About 57 per cent of respondents reported they were not planning to increase their workforce in the next three months, against 54 per cent in the previous survey.
"So, we are not expecting a better employment outlook in manufacturing in the coming months in a majority of the sectors covered by the survey,” said Ficci.