Companies are treading cautiously as most are not seeing a sustained demand. The hope is for fresh investment to trigger off a cycle of growth. But it will take longer than it appears.
Data put together by rating agency CARE Ratings shows that capacity utilization for India’s manufacturing sector continues to edge downwards, a situation which will dissuade companies from fresh investments.
New manufacturing jobs in turn will depend to a large extent on fresh manufacturing capacity and expansions. This looks increasingly unlikely in the near future as the new investment pipeline is still nascent and manufacturers are struggling to fully utilise installed capacity.
In an earlier article, I pointed out that manufacturing with a 43% share of jobs, is experiencing what can best be termed as severe stagnation - a compounded average growth rate (CAGR) of just 0.2% over the last 4-year period. For 2014-15, manufacturing performed even more badly, showing a negative growth of 5.2%.
Traditionally, manufacturers tend to look at expansion when they experience more than 90% capacity utilization in their plants, says a report this week from brokerage UBS Securities. Industry body FICCI's survey of 308 manufacturing units across 13 sectors released this week says 75% of respondents had no capacity expansion plans in the next 6 months. The same number was 68% in the March quarter.
Which means manufacturers are not seeing robust demand for the products they sell. On the flip side, there could be surrounding bullish factors that make them feel optimistic about the future. But these are evidently lacking. Incidentally, the last time utilization rates touched the 80% mark was in 2010-11.
Turns out, says CARE, this was the period that saw other favourable factors, notably lower interest rates. The Reserve Bank (RBI) increased the repo rate in the latter part of 2010-11 and topped off with subsequent increases in 2012-13 though it subsequently moderated them. Combined with low industrial growth, capacity utilisation rates remained low.
Put another way, capacity utilization rates have touched 80% when industrial growth was in the 8-9% range. That number is now in the 3-4% range. In this range, existing capacity would probably be able to meet incremental demand or at least would deter most CEOs about adding fresh capacity.
Moreover, capacity utilisation rates tend to increase in the fourth quarter of the year. CARE says this could be because companies bump up their output to meet their annual targets. However, since 2011-12, these peaks have also come down to 76.9% in 2012-13, 74.4% in 2013-14 and 73.6% in 2014-15.
How does one interpret this ?
First, we have to remember this is average data and does not apply to all industries equally. Moreover, industries like cement have added more than 90 million tonnes of capacity in the last 5 years and unsurprisingly have faced challenges of utilization, currently around 71%.
The averages are also being beaten down by sectors like auto. Capacity utilisation in India's auto industry is just 55% with cars around 57%, according to this report in Autocar Professional. Only a few companies like Maruti Suzuki are over 90% capacity while many like Tata Motors are at 19% (cars).
In recent months are things looking up for cement thanks to increasing spends by the Government on roads. Do note that infrastructure consumes only 20% of cement output. In other industries like automobiles, demand trends in recent months have been strong. But automobiles too are working at below capacity.
But there are more serious problems bubbling underneath.
A few months ago, while chairing a panel discussion for Odisha state at the Make In India Summit in Mumbai, I was struck by the sheer lack of fresh investment proposals by the captains of industry, at least in the state of Odisha. And this was a summit meant to announce and attract fresh investments!
AV Birla Group Chairman Kumar Mangalam Birla, Essar Group Chairman Shashi Ruia, Adani Group’s Rajesh Adani, GMR Group’s GBS Raju, ITC’s Yogi Deveshwar and the Tatas all dutifully tabled their appreciation of the 'good work’ by the Odisha Government and its leadership and then closed their short speeches.
Understandably, they could have said little else, what with state Chief Minister Naveen Patnaik sitting in their midst.
But this is not to blame the companies who were lining up to pay their respects. Most large manufacturing and infrastructure companies are stuck on historical investment cycles. In many cases (the subject of another piece) projects that were conceived in the last decade have not got off the ground.
Even in cases where they have – GMR Power’s 1050 MW recently commissioned Kamalanga Power Plant is an example in Odisha – further expansion will be cautious and be driven by a host of current demand and supply factors. The Odisha story resonates across the country in state after industrialised or industrializing state.
Which brings us back to the original point. When can we see jobs created by fresh capacities or expansions?
The straight answer is not too soon.
Individual companies are treading very cautiously as I can gather from all my interactions. Most are not seeing strong and sustained demand for the products they manufacture. Demand trends have tended to wildly fluctuate and have failed to reflect a clear pattern, whether consumer products or auto.
Often times, the braver companies tend not to get too swayed by data and take a bet on a larger story, in this case the India consumption story. But that is steady at best and unpredictable at worst. Sufficient to keep the factories running but not enough to take bold growth bets today.
The larger challenge, as readers of this piece would know, is that manufacturing will not add jobs at the same pace it did earlier. And nor will information technology as I pointed out in the jobs article I referenced earlier.
The hope as always is for fresh investment, both foreign and domestic to trigger off new factories, industries, manufacturing lines and thus jobs. This will surely play a role and has perhaps begun doing so. But it will take longer than it appears.
We are now looking at years, not months.