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Unlock 2.0: Industry Capacity Utilisation At A Low Ebb

Author: Dasari Sreenivasa Rao/Wednesday, July 15, 2020/Categories: Exclusive

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Unlock 2.0: Industry Capacity Utilisation At A Low Ebb

Despite further opening up in Unlock 2.0, India Inc is still grappling with several challenges, which are limiting the capacity utilisation. Subdued demand and cash-strapped consumers are the main reasons among other challenges that hit cash flows for industry and business firms. As a result, industry and services sector are expected to contract by 11.4 per cent and 2.8 per cent respectively in 2020-21, according to a latest Ficci’s Economic Outlook Survey. Weak demand and subdued capacity utilization rates were already manifesting into a drag on investments and the Covid-19 pandemic has further extended the timeline for recovery.

The Ficci survey further puts forth an annual median GDP growth forecast for 2020-21 at (-) 4.5 per cent. The minimum and maximum growth estimate stood at (-) 6.4 per cent and 1.5 per cent respectively for 2020-21. The quarterly median forecasts indicate GDP to contract by (-) 14.2 per cent in the first quarter of 2020-21. The official growth numbers for the first quarter are expected to be released by the end of August 2020.

Even though activity in sectors like consumer durables, FMCG, etc., is gaining traction, majority of the companies are still operating at low capacity utilization rates. Labour availability and feeble demand remain as major issues for the companies.

Therefore, fresh investments will be difficult to come by in the near to medium term. Also, a significant change in consumption patterns is expected on back of uncertainty with regard to jobs and income losses. Expenditure on non-essential goods is likely to remain under check for some time. In fact, the share of private final consumption expenditure in GDP has already reported a decline from 59.9 per cent in Q3 FY20 to 55.9% in Q4 FY20.

Absence of demand stimulus, a second wave of the pandemic and continuation of social distancing and quarantine measures will weigh heavy on growth prospects. With demand and investment outlook muted, robust government expenditure has been the only saviour. Nonetheless, growth is likely to bottom out post the second quarter of current fiscal year.

Some of the stimulus measures are reaching to the ground – especially through the credit guarantee scheme for MSMEs and support through MGNREGA – which is positive.

Economic activity wise annual forecast indicated a median growth of 2.7% for agriculture and allied activities for 2020-21. Agriculture seems to be the only sector with a silver lining right now.  There is an apparent upside as far as the performance of monsoon is concerned this year and the water reservoir levels in the country stand at good levels.

The rural sector supported by a steady agriculture performance and hopefully a contained number of COVID-19 cases will be a key demand generator for India this year. Further, the direct income support through PM-KISAN and increased allocation to MGNREGA is helping the returnee migrants - lending support to the rural economy.

The median growth forecast for IIP has been put at (-) 11.5 per cent for the year 2020-21 with a minimum and maximum range of (-) 15.3 per cent and one per cent respectively.

The outlook of participating economists on inflation remained modest. WPI based inflation rate is projected at -0.3 per cent in 2020-21, with a minimum and maximum range of (-) 1.5 per cent and 2.5 per cent respectively.

On the other hand, CPI based inflation has a median forecast of 4.4 per cent for 2020-21, with a minimum and maximum range of 3.3 per cent and six per cent respectively. On the external front, the median current account balance forecast has been pegged at (-) 0.3% of GDP for 2020-21. In addition to the forecast of key macro variables, economists were asked to share their views on certain contemporary subjects as well.

The writer is a business journalist with 27 years of experience


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