The Reserve Bank of India (RBI) sees recovery in growth, which would lead to more demand for finished goods of the manufacturing sector. Capacity utilisation is improving in the sector but so are input costs. One of the key components in the latter would be rising crude oil prices.“Recent firming up of international crude oil prices might reduce net external demand and also adversely impact the profitability of domestic firms by raising input costs,” RBI’s monetary policy report has noted.
Input price pressure, of both raw materials and capital, and sluggish demand leaving manufacturers with inadequate pricing power, could mean less profit margin in the coming quarter, said RBI in its industrial outlook survey for the March quarter.
Manufacturers are not in a position to pass on the entire rise in input costs to customers. “Selling prices are also expected to increase but not sufficiently to protect profit margins,” goes the survey report. This would also constrain these companies in servicing their loan obligations, even if growth takes shape and, as RBI expects, double-digit credit growth of the banking sector gets broader and sustainable.
The strain could be felt substantially in the power sector, half of which has an interest cover ratio of less than one, Credit Suisse earlier estimated. This means their earnings are not enough to service the interest on loans.
The survey, done between January and March, found the respondents were optimistic on demand conditions. However, the demand upturn anticipated in the previous two quarters had dipped in this quarter, with a subdued outlook on all indicators, barring export and import. However, the survey said the manufacturing sector’s overall financial situation seems to have improved, with positive sentiment on availability of finance, especially from internal accrual, outweighing the higher cost.
The monetary policy report said the output gap was closing, due to strengthening of economic activity since the second quarter of 2017. Capacity utilisation (CU) saw a slight rise and stood at 71.8 per cent in that quarter. However, seasonally adjusted CU declined marginally, found RBI’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS).
The latter survey was released alongside the RBI policy report. The OBICUS survey saw substantial growth in new orders received by companies in the third quarter of 2017 over levels in the previous quarter and also a year before.