As demand falls, Indian factories’ hum grows faint
2 min read.Updated: 06 Apr 2020, 11:36 PM ISTVivek Kaul
Data released by the RBI suggests that capacity utilization of manufacturing companies in October-December 2019 was at its lowest since the bank began tracking this metric in 2008-09. Mint takes a look at what this means in the broader economic context.
What is the level of capacity utilization?
The capacity utilization of 701 manufacturing companies for October-December 2019 was 68.6%. This basically means that slightly less than one-third of the capacity of these companies is lying unused. For June-September 2019 the figure was 69.1%. These are the lowest two levels of capacity utilization since RBI started measuring this metric from April-June 2008 onwards. What does this tell us? That private consumption in India has been slowing down even before the covid-19 crisis. This has led to manufacturing companies utilizing a lower part of their production capacity.
What does this mean for economic activity?
The different parts of the economy are all connected to one another and do not work in isolation. How one part behaves has an impact on the other. Over the last few years, income growth has slowed down. This has led to a slowdown in private consumption growth. In 2019-20 people bought fewer cars, scooters, mopeds, motorcycles, tractors, commercial vehicles, etc., than they did before. Sales growth at fast moving consumer goods firms also fell. With people buying less, there is no point in companies making goods at the same pace as before. This has led to a cut in production that is visible in the reduced capacity utilization levels.
How did the situation evolve over 2019-20?
Capacity utilization was 76.1% during January-March 2019. From that level, it has fallen to 68.6% in October-December. Such a dramatic fall was not seen even after the financial crisis struck in September 2008. This tells us that the Indian economy was already in trouble before the covid-19 crisis. This crisis will only make the situation worse.
How does the future look on this front?
The period from January-June 2020 will see even lower capacity utilization levels. People have been able to spend only on essentials such as food, milk and medicines during the lockdown. Even after the lockdown, they are likely to conserve cash in an environment where economic activity is likely to remain subdued. This will mean even lower capacity utilization levels for manufacturing companies. If people don’t buy goods at the same pace as they did earlier, there is no point in companies producing them.
What other impact is this likely to have?
The share of investments in gross domestic product during April-December 2019 was just 27.1% in nominal terms. With nearly one-third of production capacities of companies lying unused, there is no real need for them to invest and expand. This means the share is likely to fall further in 2020-21. This implies lower job creation, fewer opportunities for the country’s youth and more problems on the demographic dividend front.