Today, the Reserve Bank released the results of the 95th round of the Industrial Outlook Survey (IOS). The survey encapsulates qualitative assessment of the business climate by Indian manufacturing companies for Q2:2021-22 and their expectations for Q3:2021-22¹. In all, 1414 companies responded in this round of the survey conducted during July-September 2021. 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 Q2: 2021-22

• Manufacturing companies assessed a rebound in demand conditions based on production, order books and employment conditions during Q2:2021-22 after the contraction witnessed in Q1:2021-22 in the wake of second wave of the pandemic (Table A).

• Capacity utilisation improved in Q2:2021-22 after a decline in the previous quarter.

• Sentiments on financial situation improved substantially and optimism prevailed on availability of finance from all three sources (viz., internal accruals, banks and overseas).

• Manufacturers perceived higher cost burdens stemming from input costs, cost of finance and salary outgo; they also assessed that a rise in selling prices would aid a recovery in profit margins.

• The business assessment index (BAI)² surged to 116.7 in Q2:2021-22 from 89.7 in the previous quarter, reflecting improvement in overall business sentiments in the Indian manufacturing sector (Chart 1).

B. Expectations for Q3: 2021-22

• Production volumes, new orders and job landscape are expected to expand further in Q3:2021-22.

• Manufacturers expect extended improvements in their capacity utilisation and overall financial situation.

• Input cost pressures are likely to amplify in Q3:2021-22; selling prices and profit margins are expected to rise.

• The business expectations index (BEI) surged further to 135.7 in Q3:2021-22 from 124.1 in the previous quarter (Chart 1).

C. Expectations for Q4:2021-22 and Q1:2022-23

• Manufacturers perceive sequential improvements in production volume, order books, capacity utilisation, employment and overall business situation till Q1:2022-23 (Table B).

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

Note: Please see the excel file for time series data.

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 August 6, 2021. This round of the survey was launched on July 20, 2021 and results were compiled with data received till September 24, 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.