RBI Policy: Business sentiment in manufacturing weak, capacity addition slow

Overall business sentiment in the Indian manufacturing sector has deteriorated recently, the Monetary Policy Report has noted.

“The business assessment index (BAI) fell to 92.5 in Q2:2019-20 (from 108.4 in Q1:2019-20) in the 87^th round of the Reserve Bank’s Industrial Outlook Survey (IOS) due to a decline in new orders, contraction in production, lower capacity utilization and fall in profit margins of the surveyed firms,” the Monetary Policy report said.

It also flagged a moderation in Business expectations index (BEI) to 102.2 for the third quarter, from 112.8 for the second quarter.

The manufacturing purchasing managers’ index (PMI) for September 2019 was unchanged at its previous month level, while new orders and employment improved, albeit, marginally, new export orders declined.

According to the report, the near-term outlook of the Indian economy is “fraught with several risks.”

Private consumption, which all along supported economic activity, is now beginning to slow down due to a host of factors. Large employment generating sectors such as automobile and real estate are struggling.

Bank credit growth has slowed down and overall fund flows to the commercial sector have declined, partly due to risk aversion and partly due to a slowdown in demand.

Further, global uncertainties have weakened domestic investment activity, the report said, adding that escalation of trade tensions could adversely impact export prospects and delay a recovery in investments.

“The private corporate sector has not been adding new capacities even as existing capacity utilisation has risen close to its longterm average for several quarters,” the report said.

The RBI is hopeful that the recent measures such as the sharp cut in corporate tax rates, stressed assets funds for the housing sector, infrastructure investment funds, implementation of a fully electronic GST refund system and funds for export guarantee would be helpful. Also, the recent recapitalisation of public sector banks should improve credit flows in the system and help kickstart the capex cycle.