Mixed signals in capacity utilization: Cement, steel up, FMCG, auto lag

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Mixed signals in capacity utilization: Cement, steel up, FMCG, auto lag

  • THE STEADY uptick in capacity utilisation in the manufacturing sector over three quarters till March-end 2022 are encouraging.
  • Tighter monetary policy conditions and subdued demand may weigh on the investment sentiment.

Mixed Signals

  • Capacity utilisation of 75-80 percent needs to be sustained over 3-4 quarters for it to translate into an expansionary drive by the industry.
  • While steel and cement are witnessing an uptick, capacity utilisation in auto and consumer goods continue to lag.
  • The capacity utilisation in manufacturing rose to 74.5 per cent in January-March 2022 from 72.4 per cent in October-December 2021 and 68.3 percent in July-September 2021.
  • But in sectors such as FMCG and automobiles, demand concerns weigh heavily.
  • While some auto segments like commercial vehicles and SUVs are seeing a spike in demand, mass market segments like two-wheelers and smaller cars continue to struggle to gain volumes.
  • In FY22, as per data provided by Society of Indian Automobile Manufacturers, two-wheeler dispatches fell to a 10-year low of 1.35 lakh units.
  • Similarly, demand has remained subdued for FMCG companies, with a marginal sales growth visible in value terms, but falling demand as evidenced by flagging volumes.

Watch Demand

  • If demand survives despite tighter monetary conditions, higher interest rates, smaller MSP increase and low wage growth, then we can say the demand is there for augmentation of capacity despite the high interest rate scenario.
  • In a report last Thursday, ICRA said its business activity monitor more-than-doubled to 38.7 per cent in May 2022 from 16.4 per cent in April 2022.
  • Eight of the 14 non-financial indicators recorded improved volumes in May relative to the pre Covid level of May 2019, but six indicators lagged their pre-pandemic volumes including production and sales of automobiles due to supply side issues and constrained demand amidst high ownership costs, diesel consumption and domestic airline passenger traffic amid gradual recovery in contact-intensive services.

What capacity utilisation reflects?

  • The capacity utilisation reflects demand conditions in an economy where production processes respond to changing demand and it fluctuates accordingly.
  • Rising demand may translate into upward pressure on the general price level and so higher capacity utilisation can be accompanied by rise in inflation.

Prelims Takeaway

  • Macroeconomic Fundamentals