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Manufacturing slows in Q3-2016 despite Digital India & Make in India campaigns

NEW DELHI: Despite the emphasis on Digital India and Make In India campaigns and perhaps largely due to expectations of the Goods and Service Tax (GST) that never came through, manufacturing of electrical and electronic goods failed to pick up much during 2015.

What?s more, the outlook the third quarter of 2015-16 predicts a slowdown due to various factors, according to the quarterly Manufacturing Survey conducted by FICCI.

Considering that the Digital Addressable System (DAS) Phase III becomes a reality from New Year?s Day and the countdown begins for the final phase, and with auction for FM Radio Phase III having commenced, the slowdown in manufacture of electronic goods is not good news for the electronic media industry, which depends largely on set top boxes (STBs) and other electronic equipment.

The FICCI survey says the outlook for Indian manufacturing sector in Q3 of 2015-16 looks to be weakening, as lesser percentage of respondents expect high growth to continue in Q-3 (October-December 2015-16). The percentage of respondents expecting higher growth in Q3 has gone down to 55 per cent as compared to 63 per cent for Q2 (July-September 2015-16), according to the survey.

The survey had earlier indicated revival in the manufacturing activity in Q2 of 2015-16, which seems to be slowing down a little bit in Q3 now. The outlook on the basis of FICCI Manufacturing Survey for Q2 of 2015-16 was more optimistic than in the current quarter. Exports are primarily responsible for this less optimistic outlook besides domestic factors like poor demand conditions, high interest cost etc.

The quarterly survey gauges the expectations of manufacturers for Q3 2015-16 for 12 major sectors namely textiles, capital goods, metals, chemicals, cement and ceramics, electronics, auto, leather & footwear, machine tools, food, tyre, and textiles machinery. Responses have been drawn from 336 manufacturing units from both large and SME segments with a combined annual turnover of over Rs 3.94 trillion.

The survey had earlier indicated revival in the manufacturing activity in Q2 2015-16, which seems to be slowing down little bit in Q3 now. The percentage of respondents expecting higher growth in Q3 has gone down to 55 per cent as compared to 63 per cent for Q2 2015-16.

Exports are primarily responsible for this less optimistic outlook besides domestic factors like poor demand conditions, high interest cost etc.

In terms of investment, for Q3 2015-16, 68 per cent respondents as against 73-75 per cent respondents in earlier quarters reported that they don?t have any plans for capacity additions for the next six months implying slack in the private sector investments in manufacturing to continue, even though there is a fall in the percentage of respondents not looking at fresh investments. Poor demand conditions, high cost of borrowing, delayed clearances and cost escalation are some of the major constraints, which are affecting the expansion plans of the respondents.

In Electronics and Electrical, the survey shows that average capacity utilisation in the second quarter was 65 per cent, which was only higher than one (textiles) of the 12 sectors surveyed. In fact, it had fallen by five per cent over the same period last fiscal.

At a glance, the quarterly outlook for the sector shows moderate outlook for production, no capacity addition expected in the next six months, and a bleak outlook for both hiring and exports.

Implementation of GST and keeping the sector at the lowest tax slab; imposing anti-dumping duty on imports of Dry Batteries; support of the tier 2 supplier by schemes (reward, recognition or subsidies), which can encourage them to improve their product quality; and reduction of interest rate are some of the suggestions from the respondents.

The Electronics and Electrical sector for the October-December 2015 quarter witnessed 63 per cent respondents reporting higher levels of production on year-on-year basis though the level of growth itself may not be high.

On the other hand, only 30 per cent of the respondents reported a higher level of orders for the October-December quarter as compared to the previous quarter while 50 per cent reported no improvement in their order books.

Current capacity utilisation in the industry is around 65 per cent. Primarily owing to the lower current utilisation, 81 per cent respondents reportedly don?t have any plans to add any fresh capacity in next few months.

A third of the respondents reported negative growth in exports in the October-December 2015 quarter as compared to the same quarter of last year. Also, 56 per cent reported no change in exports during the same period.

Sixty per cent respondents maintained average inventory levels during October-December 2015 whereas only about a third maintained a higher inventory level. Almost all respondents were reluctant when asked about their plans of hiring additional work force in next three months.

The Electronics industry respondents are availing credit at an average rate of 12 per cent. Around 40 per cent respondents in the sector expect the manufacturing sector to revive in the next six months while another 40 per cent expect no significant growth.

About 30 per cent respondents reported that their production cost has increased than that of last year while costs remained same for 40 per cent respondents. Rising labour wages and rupee devaluation have been cited as the key reasons towards this end. Prices of raw materials, uncertainty of economic environment, lack of domestic and export demand, deficiency of power and competition faced from imports are significantly affecting the growth of this sector.

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