Today, the Reserve Bank released the results of the 94th round of the Industrial Outlook Survey (IOS) conducted during April-June 2021. The survey encapsulates qualitative assessment of the business climate by Indian manufacturing companies for Q1:2021-22 and their expectations for Q2:2021-22¹. In all, 1281 companies responded in this round of the survey. Owing to uncertainty driven by the COVID-19 pandemic, an additional block was included in this round of the survey for assessing the outlook on key parameters for two quarters ahead as well as three quarters ahead.

Highlights:

A. Assessment for Q1: 2021-22

• Manufacturing companies assessed deterioration in demand condition measured in terms of production, order books and employment situation during Q1:2021-22 (Table A).

• Sentiments on financial situation turned negative, driven by decline in all three sources of finance (viz., banks, internal accruals and overseas).

• Manufacturers perceived higher cost burdens from cost of finance and salary outgo. Input cost pressure remained high but the pessimism was somewhat lower than the previous round.

• Respondents polled moderation in selling prices and the sentiments on profit margins remained subdued.

• The business assessment index (BAI)² contracted to 89.7 in Q1 from 113.1 in previous quarter (Chart 1); the decline was much lower than that witnessed around the onset of the pandemic during Q1:2020-21.

B. Expectations for Q2: 2021-22

• Production volumes, new orders and job landscape are expected to improve in Q2:2021-22.

• Manufacturers expect improvement in overall financial situation.

• A major segment of the respondents anticipates continued pressure from input costs and salary outgo, though the share of such companies declined marginally.

• More companies expect profit margins to improve.

• The business expectations index (BEI) increased further to 124.1 in Q2:2021-22 from 119.6 in Q1:2021-22 (Chart 1).

C. Expectations for Q3:2021-22 and Q4:2021-22

• Manufacturers perceive further improvement in production and overall business situation in Q3:2021-22; and exhibit optimism for Q4:2021-22 (Table B).

• Capacity utilisation and employment conditions are expected to improve.

• Respondents expect input cost pressure to continue, albeit with marginal easing, and selling prices to harden.

¹ The survey results reflect the respondents’ views, which are not necessarily shared by the Reserve Bank. Results of the previous survey round were released on the Bank’s website on April 7, 2021. This round of the survey was launched on April 22, 2021 and results were compiled with data received till June 30, 2021.

² For each survey round, two indices are computed – one based on assessment [viz., Business Assessment Index (BAI)] and another based on expectations [viz., Business Expectations Index (BEI)]. Each index is a composite indicator calculated as a simple average of nine business parameters, where each parameter is derived as a weighted net response, weights being the share of industry groups in gross value added (GVA). The nine parameters considered are: (1) overall business situation; (2) production; (3) order books; (4) inventory of raw material; (5) inventory of finished goods; (6) profit margins; (7) employment; (8) exports; and (9) capacity utilisation. BAI/BEI gives a snapshot of the business outlook in every quarter and takes values between 0 and 200, with 100 being the threshold separating expansion from contraction.

³ Net Response (NR) is the difference between the percentage of respondents reporting optimism and those reporting pessimism. It ranges between -100 to 100. Any value greater than zero indicates expansion/optimism and any value less than zero indicates contraction/pessimism. In other words, 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.e., I+D+E=100). For example, increase in production is optimism whereas decrease in cost of raw material is optimism.