The 77th round of the Industrial Outlook Survey (IOS) conducted by the Reserve Bank of India provides a qualitative assessment of the business situation by companies in the Indian manufacturing sector for Q4:2016-17 and their expectations for Q1:2017-18¹. Responses were received from 1244 companies in this round of the survey.

Highlights:

1. Assessment for Q4:2016-17

1.1 There is substantial improvement in sentiments on demand conditions, with respondents more optimistic about production, order books and capacity utilisation in Q4: 2016-17 than a quarter ago.

1.2 The overall financial situation and availability of finance from banks and other sources were also perceived to have improved.

1.3 While respondents were slightly more optimistic than a quarter ago about selling prices, continued pressure from rising cost of raw materials adversely affected profit margins, which remained in the contraction zone.

1.4 Overall, business sentiments in the Indian manufacturing sector improved marginally the Business Expectations Index (BEI)² rose from 101.1 in Q3:2016-17 to 106.0 in Q4:2016-17.

2. Expectations for Q1: 2017-18

2.1 The outlook on business sentiments for Q1: 2017-18 largely remained similar to the previous quarter, with order books expected to improve, the cost of raw materials expected to increase further, but with greater optimism on pass through to the selling price, leaving the profit margin unaffected.

2.2 The BEI for Q1:2017-18 rose to 114.2 from 111.1 in the previous quarter.

¹ The survey responses are those of the respondents and are not necessarily shared by the Reserve Bank of India. The 76th round (Q3:2016-17) survey results were released on January 25, 2017 on the RBI website.

² The Business Expectation Index (BEI) is a composite indicator calculated as weighted (share of GVA of different industry group) net response of nine business indicators. The nine indicators considered for computation of BEI are: (1) overall business situation, (2) production, (3) order books, (4) inventory of raw material, (5) inventory of finished goods, (6) profit margin, (7) employment, (8) exports and (9) capacity utilisation. It gives a single snapshot of business outlook in every quarter. BEI lies between 0 to 200, and 100 is the threshold separating expansion from contraction.

³ Net Response (NR) is the difference of percentage of the respondents reporting optimism and that reporting pessimism. The range is -100 to 100. Any value greater than zero indicates expansion/optimism and any value less than zero indicates contraction/pessimism i.e., NR = (I – D); where, I is the percentage response of ‘Increase/optimism’, and D is the percentage response of ‘Decrease/pessimism’ and E is the percentage response as ‘no change/Equal’; I+D+E=100. For example, increase in production is optimism whereas decrease in cost of raw material is optimism.