Quarterly Industrial Outlook Survey: January - March 2010 (49th Round)*

This article presents the survey findings of Industrial Outlook Survey conducted for January- March 2010 quarter, the 49th round in the series. It gives the assessment of business situation of companies in manufacturing sector, for the quarter January- March 2010, and their expectations for the ensuing quarter April -June 2010. The survey findings indicate that India’s manufacturing sector continued to recover robustly from a very modest slowdown that prevailed in the second half of 2008-09 fiscal year, with business conditions improving at an accelerated pace. Strong gains in new orders buoyed by strong demand from home and abroad, and further gains in output led companies in the sector to expand their input purchases and expand their raw material stocks. The Business Expectation Index registered an increase of 5.1 per cent (from 112.8 to 118.5) over the previous survey quarter indicating another strong improvement in the verve of the manufacturing sector.

Highlights

The survey conducted in January-March 2010 signals continued improvement in the sentiments of the manufacturing sector which indicates that India’s manufacturing economy continued to expand pointing towards a robust growth in the overall performance. The seasonality that prevailed during the Q4 quarter of the financial years has shadowed the expected performance of the manufacturing sector for April-June 2010 quarter with the net responses of all the leading indicators falling at a lesser extend.

• The demand conditions show signs of further escalation in the survey quarter pointing towards economic boom. This is reflected from the enhanced growth in production, order books and export and import orders in the current quarter as compared to previous quarter. This suggests strong demand for Indian’s exports as the global economy recovers. In addition, domestic demand is strengthening as business conditions accelerate in line with a high level of confidence. The inventory levels (both raw material and finished goods) for the current quarter has shown no significant change over the previous quarter. However the demand situation shows a slow pace for the ensuing quarter.

• The financial conditions show a further recuperation as more respondents assessed ‘betterment’ of overall financial situation during the assessment quarter under review. The working capital finance requirement and availability of finance has grown further which suggests that demand for short term funds from the private sector may rise in the coming months. Input price inflation remained sharp during the latest survey period, with respondents reporting greater raw material costs. The pressure on profit margins is expected to be relieved in the coming months and as a sign of gradual return of the pricing power, the selling prices are expected to increase. According to the survey findings, the outlook for employment is also improving though at a lower speed as compared to the previous quarter.

• The Business Expectation Index (BEI) based on assessment for January-March 2010 has remained in growth terrain and reached to 118.5 from 112.8. The Index for January-March 2010 though maintained the upsurge with the index moving up by 5.1 per cent; the acceleration on the same is seen to be moving down by a few notches for the ensuing quarter and has moderated slightly from 120.6 in the last survey to 119.8 in the current survey

• The industry-wise break-up shows that while all the industry groups have positive overall business sentiments in the present quarter, specifically a few industry groups, viz., Diversified, Pharmaceuticals and Medicines, Basic Chemicals, Metals and Metal Products are more optimistic than the others. Cement, Food, Wood & Wood products and Rubber expect low business performance in Q1 FY10. Cement industry shows low order book and capacity utilisation, and profits and prices are expected to decline.

• Size wise analysis shows that the improvement is seen across all size groups, but the bigger companies are most optimistic and they expect high order book, building up inventory and return of pricing power. The smaller companies (annual production less than Rs 100 crore) though have improved in their performance; their growth is at a lower rate as compared to bigger companies.

Introduction

The Reserve Bank of India has been conducting the Industrial Outlook Survey (IOS) on a quarterly basis since 1998. The Survey gives insight into the perception of the public and private limited companies engaged in manufacturing activities about their own performance and prospects. The survey covers selected non-financial private and public limited companies with a good size/industry representation. The assessment of business sentiments for the current quarter and expectations for the ensuing quarter are based on qualitative responses on 20 major parameters covering overall business situation, financial situation, demand indicators, price and employment expectations, profit margins, etc. The survey provides useful forward looking inputs for policymakers, analysts and business alike.

II. Data Coverage and Methodology¹

II.1. Sample Size

The sample covers about 2298 nonfinancial public and private limited companies, mostly with paid up capital above Rs. 50 lakh, in the manufacturing sector. The fieldwork for the survey was carried out by outsourcing it during the two-month period ending February 2010. The panel of respondents is kept uniform to the extent possible except for periodic updation in the case of addition of new companies or deletion of closed/merged companies. The sample is chosen so as to get a good representation of size and industry.

II.2. Response to the Survey

The survey elicited response from 1093 companies (48 per cent of the sample) within the stipulated time. Companies with incomplete or improperly filled-in schedules were excluded for the analysis. The study is based on responses of 1079 companies which were included in the analysis.

II.3. The Survey Schedule

The survey schedule predominantly consists of qualitative questions and the target respondents are senior management personnel or finance heads of the companies. The schedule canvassed on quarterly basis runs into two pages containing five blocks. (Annex)

III. Survey Findings

The survey results are being published in a concise form in the Reserve Bank’s quarterly publication ‘Macroeconomic and Monetary Developments’ since 2005 and Monetary Policy statements. The survey findings of the 49th round conducted for January- March 2010 quarter are presented in this article.

III.1. Demand conditions

Survey collects perceptions of the Indian manufacturers about prominent demand related parameters, namely; Production, Order Books, Capacity Utilisation, Inventory, Exports and Imports.

III.1.1. Production

The questions on production seek the company’s assessment for January- March 2010 and expectations for April-June 2010 of Production (for all products), whether it will increase, decrease, or there will be no change. On the output front, the net responses on the assessment went up to 36.5 from 28.9 where as its expectation on the same registered a significant fall to 35.9 from 40.0 observed in the preceding round (Table: 1and Chart: 1). This shows that although the demand conditions are improving for the assessment quarter, the manufacturers anticipate a little plunge on the same in the near future.

III.1.2. Order Books

The demand position of the manufacturing companies, as directly measured by order books, has shown a similar trend. The net responses which showed an improved optimism level in the assessment quarter has reversed from its increasing trend in the ensuing quarter. The net response has gone up to 31.9 from 25.9 per cent for the assessment quarter. On the other hand for the ensuing quarter the same has dropped marginally to 33.4 from 35.8 with respect to the previous survey round. (Table:2 and Chart: 2)

III.1.3. Pending orders

The question was asked to the manufacturing companies to seek information whether pending orders for current and next quarter will be above normal, normal or below normal. It is seen that the sentiment level for maintaining pending order ‘below normal’ for assessment has decreased over preceding quarters. The net responses for assessment have also decreased while expectation for April-June 2010 exhibits a minor increase (Table: 3 and Chart: 3).

III.1.4. Capacity Utilisation

Another important economic variable indicative of demand in the economy is the utilisation of capacity, the extent to which an enterprise actually uses its installed capacity. The survey has three questions on capacity utilisation. It collects views of manufacturing companies about Capacity Utilisation of main product (increase/ decrease/ no change), Level of capacity utilisation compared to the average in the last four quarters (above normal/ below normal/ normal) and Assessment of production capacity with regard to expected demand in next six months (more than adequate/ less than adequate/ adequate).

More companies reported an increase in capacity utilisation compared to previous quarter, indicating further improvement in Capacity Utilisation, and this level of capacity utilisation is above normal as seen in the context of capacity level attained in the last four quarters. The expectation for the next quarter also exhibited the similar sentiment but at a lower degree. Assessment of Production capacity with regard to expected demand in next six months shows that there will be adequate capacity as proportion of companies that expressed about adequate production capacity in meeting the demand for the next 6 months has moved up. (Table: 4 and Chart: 4)

III.1.5. Inventory of Raw materials & finished goods (in quantity terms)

Majority of the respondents (81-85 per cent) reported average level of Inventory of raw materials and Inventory of finished goods for the current quarter as well as ensuing quarter. The responses on level ofInventory (raw material and finished goods) in the current quarter and ensuing quarter (Table: 5) reveals that there is no significant change in inventory holding (both raw material and finished goods) as compared to the last survey round (October- December 2009).

III.1.6. Exports and Imports

The external demand of manufacturing companies is gauged by the survey through their assessment and expectation of Exports and Imports. The companies report their perceptions in the form; increase, no change and decrease in Exports and Imports.

The survey results show that the assessment about Export growth shows recovery in the current quarter. The net response for the current quarter has improved further as compared to previous quarter turning 9.2 per cent to 12.7 percent. However external demand is not expected to grow at a fast pace in the ensuing quarter as the net response has dropped to 18.5 percent from 20.2 in the last quarter (Table: 6). This is in consonance with the similar trend echoed in order books and production as well.

The manufacturing sector is seen to be more optimistic in terms of demand for import. The net response on assessment and expectation for Import is in the growth terrain. The sentiments have increased further from the preceding rounds for both the quarters under review (17.1 per cent for both the assessment and expectation quarters, Table: 7). The movements in the sentiments for exports and imports is presented in Chart: 5.

III.2. Financial Situation

The survey assesses sentiments about financial condition through five parameters, viz., Overall Financial Situation, Working Capital Finance Requirement (excluding internal sources of funds), Availability of Finance (both internal and external sources), Cost of External Finance and Profit Margin.

III.2.1. Overall Financial Situation

Indubitably corporates gauge a positive assessment about the Overall Financial Situation for the current quarter (January- March 2010), as more respondents assessed ‘betterment’ of overall financial situation during the current quarter. The net response showed significant improvement (35.8 per cent from 29.5 per cent) as compared to preceding quarter (Table: 8). The expectations for the ensuing quarter (April- June 2010) registered a minor fall in the level of optimism (net response of 36.3 per cent as compared to 39.3 per cent). Chart: 6 reveal the trend that exhibits in the optimism on Overall Financial Situation.

III.2.2. Working Capital Finance requirement and Availability of Finance

The assessment and expectations on the Working capital finance requirement (excluding internal source of funds) for the assessment quarter January-March 2010, registered marginal improvement. The net response increased from 28.8 per cent to 30.5 percent. The expectation on the same shows a marginal drop as the net response registered a significant fall from 32.7 per cent to 27.7 per cent (Table: 9).

It is observed that though 62 per cent of respondents do not see any change in Availability of Finance (from both internal as well as external sources) during the quarters under study, the percent of respondents who viewed improvement in Availability of Finance as well as the net optimism has been enhanced (Table: 10). The quarterly movements of Working Capital Finance Requirements (WCFR) and Availability of Finance (both internal and external sources), presented in the chart below, shows that for ensuing quarter, the manufacturers’ expect their WCFR and availability of finance to slow down compared to previous quarter. Chart: 7 show the trends in Working Capital Finance Requirements (WCFR) and Availability of Finance.

III.2.3 Cost of External Finance

The cost of external finance was included in the survey schedule from Round 48 (October- December 2009) onwards. The respondents are asked to express their opinion on a three point scale viz; Increase/ Decrease/ No change about their perceptions of cost of funds. Although twothird of the respondents opined ‘no change’ in cost of external finance for both the quarters under review, more respondents expected the cost of external finance to increase.

III.2.4. Profit margin

Survey asks manufacturing companies whether in their opinion profit margin gross profits as percentage at net sales) expected to increase, decrease or remain same. The sentiments on Profit margin for the current quarter of the survey though improved sharply, they are still in the negative terrain (Table: 11). However, the extent of pessimism has declined compared to preceding quarter (Chart: 8). The sentiments on expectation for the ensuing quarter has improved further (1.1per cent to 3.2 per cent).

III.3. Price and Employment Expectation

Prices related three questions were canvassed in the survey. The questions sought increase, decrease or no change in the Cost of Raw Material and those of Selling Prices (exfactory unit prices); and if there was an increase expected on Selling Prices, enquiries are made about the rate of increase in the Selling Prices (at higher/lower/similar rate).

III.3.1. Cost of raw material

The net response on cost of raw material of the reporting companies declined further in both the quarters under review, as compared to the previous round indicating that the manufactures are more concerned on cost of raw material. This is due to the reason that more respondents opine ‘increase’ in raw material prices as compared to preceding quarter (Table: 12). Thus the manufacturing corporates fear that their input price is likely to increase further.

III.3.2. Selling price

Survey seeks responses from manufacturing corporate about ex-factory Selling Prices. In case of multi-product companies, they are requested to take into account the average of the price changes. Optimism level for Selling prices (‘increase in selling price’) for the current quarter registered a boost and the net response too has increased sharply from 2.6 percent to 12.4 per cent (Table: 13). However, corporates expected the optimism level to increase in the ensuing quarter which is mainly due to increase in proportion of ‘increase in selling price’ and also a decline in the percentage of respondents who opined a decrease in selling price as compared to previous round is seen. While 12.2 percent corporates opined about a ‘decline’ in the selling prices in the current quarter, only 9.1 expected this decline to continue in April-June 2010 as well.

Among the respondents that viewed an ‘increase’ in selling prices, 31.1 per cent of respondents viewed the increase to be ‘at lower rate’ for the assessment quarter. The movement of input and output prices is presented in Chart: 9.

III.3.3. Employment

Industrial Outlook Survey seeks from the companies their perceptions on change in employment at their company. Employment includes all cadres comprising full-time, parttime and casual labour. The employment outlook of Indian manufacturing has continued its recovery in the current quarter (January- March 2010). The companies will be hiring almost at the same level in the current quarter compared to the last quarter (net response from 10.3 per cent to 13.7 per cent, Table: 14). A similar improvement is also observed in the employment expectation for the April-June 2010 (Chart: 10).

III.4. Overall business conditions

III.4.1 : Overall Business Situation

The Overall Business Situation is a parameter that provides the overall confidence of manufacturing companies. The companies are enquired if their overall business situation would become better/ worsen /remain same. The net response for assessment about the Overall business situation during the current quarter January- March 2010 shows marked improvement from 36.0 per cent to the level of 43.1 per cent in the previous quarter. The net response for expectation has also shown a prevailing trend but at a lower rate (from 44.9 per cent to 41.2 per cent). The net response on the assessment and expectation presented in Table: 15, shows the trend in business sentiments from the previous quarters. The movement of the overall business situation is presented in chart 11.

III.4.2 : Business Expectation Index

Business Expectation Index gives a single snapshot of the industrial outlook in each study quarter. This index is computed based on weighted average of responses from different industries on selected 9 out of the 20 performance parameters. These parameters are Overall Business Situation, Production, Order Books, Inventory of Raw Materials, Inventory of Finished Goods, Profit Margin, Employment, Exports, and Capacity Utilization.

The present round of the survey shows further improvement in the BEI by 5.1 per cent over the preceding round (October- December 2009). The BEI for January-March 2010 was at 118.5 increased from 112.8 and for ensuing quarter it has dropped to 119.8 as compared to 120.6 seen in the previous quarter (Chart: 12).

III.5: Industry-wise analysis ²

Diversified (11), Pharmaceuticals & Medicines (71), Basic Chemicals (85), Basic Metals and Metal Products (133), Rubber & Plastic products (69), Other Machinery and Apparatus (139) and Electrical machinery (70) are generally more optimistic about their overall business situation for April-June 2010. They expect demand conditions to improve, and thus higher levels of production and capacity utilization. Their overall financial condition is also expected to be comfortable as compared to other industries. Wood and wood products industry is expecting an increase in their input prices. At the bottom of the list, the industries having weak, though positive, overall business sentiments are Cement (25), Food Products (85) and Wood and wood products (11). Of these Cement industry has the lowest outlook with low expectations on overall financial situations, overall business situation and profit margin (Table: 16).

III.6: Size-wise analysis Annual production and Paid-up Capital (PUC)

Bigger companies (annual production above Rs. 1000 crore) are more positive about overall business & financial situation and working capital finance requirement. The smaller companies (annual production less than Rs. 100 crore) are less optimistic about demand conditions as observed from their net responses on production, order books and capacity utilization which are at lower level than that of the larger ones. They also expect a contraction in their exports. Bigger companies are more positive about domestic and external demand. The smaller companies feel more pressure on the input price and availability of finance is also lower than their bigger counterparts. Bigger companies are expected to be net hirer; the smaller firms will continue to shed jobs. Though all firms expect a net decline in their profit margins, the small and medium firms are the worst hit. A similar trend is inferred based on the PUC size wise analysis also (Table: 17).

III.7. Constraints for attaining the normal production level

The net responses for attaining the normal production level during the quarter October- December 2009 has remained at 50.2 per cent which is slightly lower compared to last survey round (52 per cent).

The constraints reported are due to ‘Lack of domestic demand’, ‘Lack of export demand’, ‘Shortage of Raw Materials’, ‘Shortage of Power’, ‘Uncertainty of economic environment’, and Shortage of Working Capital Finance. The major industry groups for which higher proportion of companies reported production constraints are ‘Other Industries’(61 percent), ‘Fertilizers’ (60 per cent), ‘Food Products’ (59 per cent), ‘Paper and paper products’ (57 per cent), ‘Wood and wood products’ (55 per cent). On the other end of the spectrum, only 26.8 per cent of ‘Pharmaceutical & Medicines’ and 27.3 per cent of ‘Diversified’ companies reported production constraints.

Smaller companies, in terms of their annual production, paid-up capital felt more production constraints than the bigger ones.

III.8. Business Confidence Surveys of other Agencies

Comparison of other business indices with the Business Expectation Index is briefly outlined below in Table: 18 and Chart: 13.

III.9. Survey Results and Official Statistics

The Business Expectations Indices (BEI) based on the information gathered on critical parameters in the Industrial Outlook Survey provides the private manufacturing sector’s aggregate assessment of the current quarter and outlook for the ensuing quarter. Chart: 14 shows the co-movements of annual growth rates of quarterly GDP Manufacturing, IIP-Manufacturing and the BEI based on assessment and expectations where movements in BEI appear to be closely leading the official output indicators released subsequently. Chart: 15 shows the movement of output prices in assessment and expectation quarter along with WPI (Manufacturing).