Indian factories were running at 77% of their capacity in the fourth quarter of FY19, which is a six-year high, according to a survey by the Reserve Bank of India (RBI). In fact, capacity utilization has been increasing every quarter for over the past one year. This is in direct contrast to the bunch of economic data showing a deeper-than- expected slowdown in the economy.

So what gives?

The Order Books, Inventories and Capacity Utilisation Survey (OBICUS) of RBI is taken every quarter and companies are asked to volunteer information on their inventory level, order book and factory utilization level.

Economists said one possibility could be that the survey is capturing early signs of improvement in demand.

“Capacity additions and greater utilization have been observed in some sectors. But these sectors may not have directly contributed to the overall growth in the near term," said Abheek Barua, chief economist at HDFC Bank Ltd.

Barua added that capacity utilization levels have increased in power distribution, mobile tower capacity and auto ancillary sectors. As such, utilization levels may have improved only in select sectors, with large manufacturing units still operating at lower-than-full capacity.

Vipul Sharma/Mint
Vipul Sharma/Mint

Another reason for an increase in utilization could be that fresh capacity has hardly been added for a long time now. In such a scenario, even a small rise in demand could mean an increase in production using existing capacity.

Lastly, the survey itself is not as robust anymore. The number of respondents has been dropping significantly over the past one year. In the previous survey conducted for the third quarter, 860 respondents participated. The average participation number used to be above 1,000 until FY17.

Economists said not much can be read into the findings by the central bank and it should not be seen in isolation.

To be sure, more granular findings of the capacity utilization survey are not available yet, and the utilization number is an early indication. Perhaps when OBICUS will be released in its entirety with the next policy statement, a clearer picture will emerge.

Moreover, other surveys of the central bank concur with the ongoing slowdown in the economy. For instance, the Consumer Confidence Survey shows that Indians are less optimistic than before on employment prospects and earnings. The RBI policy statement noted that early findings of the industrial outlook survey show that business sentiment has not improved much either.

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