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EconomyManufacturing looks up but manufacturers want more: FICCI survey

Manufacturing looks up but manufacturers want more: FICCI survey

Growth in the manufacturing sector in the last few months is likely to sustain, but raw material prices, cost of finance, regulations etc remain challenges

Most domestic manufacturers are confident about the sustained growth momentum of the Indian economy for the next six to nine months in spite of global headwinds such as chain disruptions due to the Russia-Ukraine war and the slowdown of major economies due to rising interest rates, according to a Ficci of 300 manufacturing units with a combined turnover of Rs 2.80 lakh crore, but manufacturers want more credit to SMEs and interest rate caps among measures required for growth in the sector.

“The growth momentum picked up by the manufacturing sector in the last few months is likely to be sustained for the next six to nine months,” the Federation of Indian Chambers of Commerce and Industry (Ficci) said on Monday, citing its quarterly of manufacturing units. At the same time, respondents in the metal and metal products sector, for example, asked for “more credit availability to the MSME sector through rate of interest caps on MSME loans, (an) extension of (the) moratorium for ECLGS loans of MSME sector, reduction in compliances for MSME sector, thereby enhancing ease and cost of doing business.”

Following the revival of the Indian economy in 2021-22, the momentum of growth continued in subsequent quarters — Q1 (April-June 2022-23) and Q2 (July-Sept 2022-23) with over 61% of respondents reporting higher production levels in the second quarter of FY23, it said. The buoyancy is supported also by robust order books reported by more than half (54%) of the respondents in Q2 of FY23, the found.

Signifying the manufacturing sector’s resilience amid a global economic slowdown, the result supports the latest Purchasing Managers’ Index (PMI) for manufacturing, which was at 55.3 for October, a sequential increase (55.1 in September). A PMI value greater than 50 means an expansion in the economic activity in these sectors.

The results sync with global assessments about India in 2022 and 2023 when major global economies such as China, the European Union area and the US, are expected to slow down.

India Ratings and Research (Ind-Ra) in its macroeconomic analysis said today that “amid the ongoing global turmoil, India appears to be a shining spot” and will be G20’s fastest-growing economy by Financial Year 2026. Its optimism lies in India’s favourable demographics and its successful implementation of reforms and other measures initiated during the last couple of years.

Challenges in manufacturing now

The metal and metal products sector reported an average interest rate close to 8.6% per annum while 54.5% of respondents reported an increase in lending rates because of the increase in repo rates in the last few months with an average increase of around 0.4% in the rates.

Similarly, manufacturers of capital goods, chemicals and fertilisers, machine tools and textiles called for affordable credit access at lower interest rates to SMEs to augment their production capacity, according to the that assessed the sentiments of manufacturers for the second quarter (that ended in September) of the current fiscal across 10 key sectors including automotive and automobile components, cement, electronics and paper products.

The average interest rate paid by manufacturers decreased to 8.37% per annum as against 9.3% during the last quarter while on the other hand, the cost of production as a percentage of sales for manufacturers increased for 94% of respondents in Q2.

Comparatively less availability and higher raw material prices, such as that of steel, increased transportation, logistics, freight cost and the rise in the prices of crude oil and fuel were the main contributors to the increasing cost of production, the added. Other factors responsible for escalating production costs are higher labour costs, the high cost of carrying inventory, and fluctuation in the foreign exchange rate.

Whereas the cost of production rose for a number of manufacturers, 61% of those surveyed reported higher production levels in Q2 with an average expectation of an increase in production by over 14.86%. “This is significantly more than the percentage of respondents experiencing higher growth in Q2 of last few years including pre-covid years too.”

“High raw material prices, increased cost of finance, cumbersome regulations and clearances, shortage of working capital, high logistics cost due to rising fuel prices and blocked shipping lanes, low domestic and global demand, excess capacities due to (a) high volume of cheap imports into India, unstable market, high power tariff, shortage of skilled labour, highly volatile prices of certain metals etc and other supply chain disruptions are some of the major constraints which are affecting expansion plans of the respondents,” it said.

Some of these issues lead to an increase in production costs. “The cost of production as a percentage of sales for manufacturers in the has risen for 94% of respondents in the quarter,” it said. Reduced availability and high raw material prices especially that of steel, increased transportation, logistics and freight cost, and rise in the prices of crude oil and fuel have been the main contributors to increasing cost of production, it said. Other factors responsible for escalating production costs include enhanced labour costs, high cost of carrying inventory, and fluctuation in the foreign exchange rate, the survey report said.

Labour easily available once again

Workforce availability, which became a major challenge during the pandemic, is no longer an issue, with 81% of respondents saying that they do not have any issues with labour availability. The outlook for exports was also positive as over 42% of respondents said they expect a high increase in exports in Q2 vis-a-vis Q2 of FY22.

Respondents reported average capacity utilisation of over 70% reflecting a sustained economic activity with paper products, textile machinery and automotive and auto components reporting capacity utilisation of over 90%. It has been below the average (70%) for electronics, machine tools, textiles and metals and metal products, according to the survey. Nearly 40% of the respondents reported plans to add capacity in the next six months by over 15% on average signifying sustained demand.

The units surveyed are most likely facing problems due to global uncertainties and supply-chain disruptions attributable to the Ukraine situation and high fuel prices. While global developments are beyond the control of the Indian government, the said it may resolve several domestic issues to further unlock the potential of the manufacturing sector in India.

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