Slight uptick in exports; COVID-19 induced lockdown hit markets
The future investment outlook is subdued. Only 18% of respondents to a manufacturing sector survey for Q2 (July-Sept 2020) by FICCI reported plans for capacity additions for the next six months as compared to 22% in the previous quarter.
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%. But the recent cuts in repo rate by RBI has not led to a consequential reduction in the lending rate as reported by 55% of the respondents.
The major constraints affecting the expansion plans of the respondents are:
High raw material prices,
the high cost of finance,
Shortage of skilled labor and working capital,
High logistics cost,
Low domestic and global demand due to imposition of lockdown across all countries to contain spread of coronavirus,
Excess capacities due to the high volume of cheap imports into India,
Lack of financial assistance,
Uncertain demand scenario across the globe,
Complex procedures for obtaining environmental clearances,
High power tariff.
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 the 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.
The overall capacity utilization in manufacturing has increased to 65% Q2 (July-Sept 2020) in from 61.5% in Q4 2019-20, according to a manufacturing sector survey by FICCI.
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.
The survey covered wide areas of relevance for manufacturing like exports, capacity utilization, ongoing restrictions, availability of labour and workforce and others. In many of these areas there are signs of operations inching towards normal and in coming months could see better performance.
The survey noted that 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 the April-June quarter of 2020-21.
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 export and other guidelines in place as a response towards the COVID-19 outbreak.
The cost of production as a percentage of sales for manufacturers in the survey has risen for 70% of the respondents to the survey. This is higher than that reported in the previous year, where 64% of the respondents recorded an increase in their production costs.
Industry respondents have attributed the hike in production 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.
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.
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.
The hiring outlook for the sector, though a bit improving, shows a bleak picture as 80% of the respondents mentioned that they are not likely to hire an 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 favor of hiring an additional workforce.
The 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, said FICCI in a release on 22 Nov 2020. #manufacturing #exports #investment #economy /fiinews.com
