India's manufacturing capacity utilisation declines to the lowest ever

Capacity utilisation in India’s manufacturing sector plummeted to 68.9 per cent in the September quarter (Q2 FY20), its worst-ever level since 2008. It had reached a six-year high of 76 per cent two quarters ago, in March 2019, the Reserve Bank of India’s monetary policy committee (MPC) said in a statement on Thursday.

Capacity utilisation had improved gradually from 71 per cent in the aftermath of demonetisation to 76.1 per cent in January-March 2019.

“The slowdown in manufacturing activity was also reflected in the decline in capacity utilisation (CU) to 68.9 per cent in Q2FY20 from 73.6 per cent in Q1 in the early results of the Reserve Bank’s order books, inventories, and capacity utilisation survey (OBICUS),” the statement said.

This data corroborates the severity of the current slowdown in industry. A sharp drop of 4.7 percentage points, from 73.6 per cent to 68.9 per cent, is also unprecedented. Even the seasonally adjusted CU stood at 69.8 per cent. This indicates that whenever demand picks up from here, companies would first improve capacity use, before investing into new capacity.

Industry players said they were indeed seeing a serious fall in capacity usage, though some sectors were seeming to prevent further fall in the overall CU.

Cement is one crucial industry segment, that indicates demand for construction and infrastructure — be it roads, highways, or metro projects. For India’s largest cement producer, UltraTech, CU fell to 62 per cent in Q2 from 73 per cent in Q1, the company said.

Mahendra Singhi, MD and CEO at Dalmia Bharat, and president of the Cement Manufacturers Association, said there had been “de-growth” in cement demand (sector level) in the last eight months.

“For probably the first time, demand for cement from the rural contracted in the first half of FY20. This is an area of great concern,” he told Business Standard.

At Dalmia Bharat, capacity utilisation has touched 72 per cent. Experts said that while the cement sector started the year with near-80 per cent capacity utilisation, they estimate it to be close to 67 per cent this fiscal year. This echoes the CU in the manufacturing sector. “Capacity utilisation in the capital goods sector remained in the range 50 and 65 per cent across sub-segments. In normal times, this could have gone up to 80 per cent. We expect Q3 (current quarter ending December) to be worse, with a recovery in Q4,” said MS Unnikrishnan, MD & CEO at Thermax.  

Jindal Steel and Power, however, said the company held up capacity utilisation. “In the September quarter, our capacity utilisation was 85 per cent and has risen to 100 per cent in current quarter,” VR Sharma, managing director at JSPL, said.

When the global financial crisis hit India's economy in 2008, the RBI started surveying the manufacturing sector's capacity utilisation (CU). In Q1 of 2008-09, CU stood at 73.7 per cent, which crossed the 80 per cent mark in 2009-10.

“Sentiment in the manufacturing sector remained in pessimism in Q3 due to continuing downbeat sentiments on production, domestic and external demand, and the employment scenario,” the MPC statement said.
(With inputs from Aditi Divekar)