The Reserve Bank of India’s (RBI) latest quarterly industrial outlook survey of 1,300 manufacturing companies reveals that manufacturing companies are witnessing a slowing growth in the first and second quarter of 2024-25. This is also mirrored in manufacturing PMI which is tapering downwards.
According to RBI survey data, the net response (difference in the percentage of companies reporting optimism and those reporting pessimism) regarding production output has decreased from 27.9 per cent in Q1 2024-25 to 22.9 per cent in Q2 2024-25.
The number was 34.4 in the fourth quarter of FY24. This implies that more manufacturers witnessed slowdown in production this fiscal. One concern is that the companies polled indicated a steep fall in growth expectation of production output in the third and fourth quarter of this fiscal.
The RBI survey report states that the pressure from raw material costs, financing expenses, and salary payments has eased. As a result, expectations of growth in selling prices and profit margins have also softened.
“Manufacturers polled for better expectations on production, order books, employment, capacity utilisation and overall business situation during Q4:2024-25 and Q1:2025-26. Input cost pressures are likely to continue for manufacturers, who expect to retain pricing power and increase in selling prices on the back of robust demand conditions,” the survey report reads.
Geopolitical strife
Ramendra Verma, Partner, Grant Thornton Bharat says, “Thiscan be attributed to a chain reaction of geo-political situation, which has resulted in supply chain disruptions leading to high inputs costs (for e.g. – energy and semiconductors). This is also leading to weakening of demand.”
Similarly, net responses for order book growth dropped 25.6 per cent in Q1 2024-25 to 19.5 per cent in Q2 2024-25, while net responses for pending orders increased from 5.9 per cent to 8 per cent in the same period. Similarly, net responses for capacity utilisation fell from 18.7 per cent to 15.1 per cent.
Verma outlined several factors contributing to the low net responses for order books, such as declining consumer confidence and reduced spending, which have led to fewer new orders. Additionally, global economic uncertainties have made businesses reluctant to place large orders.
“Many manufacturers are operating below capacity due to reduced demand and supply chain disruptions,” Verma explained, adding that this under-utilisation is also linked to more cautious inventory management practices.
Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers, pointed out that the slower growth in related indicators aligns with the decline in industrial production. In Q1 FY25, capacity utilisation dropped after surpassing 75 per cent in the final quarter of the previous fiscal.
“One of the reasons for lower utilisation was elections which usually disrupts activity along with heatwaves especially in the north. This was also highlighted in the PMI survey which indicated some of the factories remained shut due to excessive heat,” Hajra added.
PMI slips
The monthly Purchasing Managers Index for India’s manufacturing sector has also shown a downward trend. It was reported at 58.8 in April 2024, remained relatively stable at 58.3 in June, but declined slightly to 57.5 in August 2024, and further dropped to 56.5 in September 2024.
The global market research firm Nomura’s report indicates a similar weakening outlook. “Even as the pace of government spending picks up in coming months and base effects become more favourable, we expect growth momentum to remain soft, due to fading urban pent-up demand, tight monetary policy, a moderation in credit growth, negative real rural wage growth, sluggish private capex and soft external demand,” the Nomura report says.