India's Q3 manufacturing outlook perks up, high production costs worrying: FICCI survey

India’s Q3 manufacturing outlook has perked up but increasing production costs and muted hiring prospects continue to be a source of anxiety.

This findings were culled from FICCI’s latest quarterly survey of the manufacturing sector, which was released on Sunday (January 30). The survey also showed that this sector was witnessing sustained economic activity and the existing average capacity utilisation was in the range of 65 to 70 per cent, said a PTI report.

The manufacturers were expecting the upcoming budget on February 1 to boost growth and investment in their sector, said the survey. For example, there was an expectation that the government will rejig customs duties on components or sub-parts of consumer electronics and mobile phones in the upcoming Union budget to encourage local manufacturing.

Nearly 63 per cent of the respondents sampled in the survey had reported higher production in the third quarter, i.e., the period from October to December 2021-22. This was nearly double the percentage of respondents (33 per cent) in the year-round period, noted the survey. Moreover, 61 per cent of the respondents had higher orders in the October to December quarter than in the July-September period.

The 12 major manufacturing sectors that were assessed for performance and sentiment in this third quarter of 2021-22 were automotive, capital goods, cement, chemicals, fertilisers and pharmaceuticals, electronics and electricals, medical devices, metal and metal products, paper products, textiles, textiles machinery and miscellaneous.

Three hundred manufacturing units from both large and SME (small and medium enterprise) segments with a combined annual turnover of over ₹2.7 lakh crore were surveyed.

However, the firms were struggling with steep raw material prices, high cost of finance, uncertainty demand, shortage of working capital, rising logistics cost, low domestic and global demand due to supply chain disruptions. All of these major challenges were acting as a deterrent for expansion.

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In this scenario, half the respondents said they however expected their exports to be higher than the same quarter last year.

Hiring sentiment was low

Even as the companies were unsure of expansion plans, the FICCI survey clearly showed that the hiring sentiment was muted. The hiring outlook for the manufacturing sector remained low with 75 per cent of the respondents admitting that they are not likely to hire additional workforce in the next three months.

According to the respondents, the average interest rates paid by manufacturers had dropped marginally from 8.7 per cent to 8.4 per cent, with recent cuts in repo rate by RBI  having no impact on the lending rate.

High cost of production

According to the respondents, the cost of production continued to rise sharply as raw materials were expensive, the costs of transportation and logistics have shot up, along with rise in the prices of diesel, LPG, natural gas, power, and fuel. But the respondents also listed other factors as well that was ramping up production costs and they were labour cost, short supply of raw material, soaring costs of carrying inventory and fluctuating foreign exchange rate.