Muted outlook for investment demand
Despite widespread fears that demonetisation would severely impact capacity utilization in the manufacturing sector, the Reserve Bank of India’s (RBI’s) latest OBICUS Survey (Order Books, Inventories and Capacity Utilisation Survey) shows that capacity utilization dipped to 72.7% in the December quarter from 73.1% in the September quarter. A dip in capacity utilization was expected, but it turned out to be marginal. Indeed, as the chart shows, capacity utilization was higher than what it was in Q3 of 2015-16. Perhaps the reason for the smaller-than-expected drop is because the OBICUS Survey is of 710 companies and therefore ignores the informal sector, which is where demonetisation must have hurt the most.
That said, another survey— RBI’s Industrial Outlook Survey for the manufacturing sector—shows that in the March 2017 quarter, 9.3% of those surveyed said that capacity utilization was above normal, while 16.1% said it was below normal. Further, 9.9% of those surveyed expect capacity utilization in the current quarter to be above normal, while 12.3% expect it to be below normal. That indicates they are unlikely to invest in capex (capital expenditure) and investment demand is unlikely to go up any time soon.