Today, the Reserve Bank released the results of the 92nd round of the Industrial Outlook Survey (IOS) conducted during October-December 2020. The survey encapsulates qualitative assessment of the business climate by Indian manufacturing companies for Q3:2020-21 and their expectations for Q4:2020-21.¹ In all, 1011 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 Q3: 2020-21

• Manufacturing companies assessed further strengthening of production, order books and employment during Q3:2020-21, driven by easing of lockdowns related to the COVID-19 pandemic and re-opening of businesses (Table A).

• Sentiments on financial situation improved in terms of availability of finance from banks and internal sources.

• Manufacturers perceived higher cost pressures stemming from purchase of inputs and salary expenses.

• Despite increase in selling prices, enterprises indicated pressures on profit margins due to higher cost burden.

• After remaining in contraction zone in the previous two quarters, the business assessment index (BAI)² moved up into expansion zone and stood at 108.6 in Q3:2020-21 from 96.2 in Q2:2020-21 (Chart 1).

B. Expectations for Q4: 2020-21

• Manufacturers expect expansion in production volumes, new orders and job landscape to continue in Q4:2020-21.

• Manufacturers’ overall financial situation portrayed further optimism.

• Respondents expect higher pressures from cost of finance, purchase of raw materials and salary outgo in Q4:2020-21.

• Selling prices are expected to increase in Q4:2020-21 but the sentiments on profit margins remained subdued on the back of higher input cost pressures.

• The business expectations index (BEI) increased further to 114.1 in Q4:2020-21 from 111.4 in Q3:2020-21 (Chart 1).

C. Expectations for Q1:2021-22 and Q2:2021-22

• Manufacturers polled further improvement in key demand indicators and overall business situation in Q1:2021-22 and Q2:2021-22 (Table B).

• Going forward, capacity utilisation and employment conditions are expected to improve further.

• Respondents expected gradual hardening of selling prices as input prices are likely to exert higher pressure.

¹ The survey results reflect the views of the respondents, which are not necessarily shared by the Reserve Bank of India. This round of the survey was launched on November 2, 2020 and results were compiled with data received till December 31, 2020. The results of the 91st round of the survey (Q2:2020-21) were released on October 9, 2020 on the RBI’s website.

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.