Today, the Reserve Bank released the results of the 90th round of the Industrial Outlook Survey (IOS) conducted during April-June, 2020. The survey encapsulates qualitative assessment of the business climate by Indian manufacturing companies for Q1:2020-21 and their expectations for Q2:2020-21¹. In all, 802 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 one year ahead.

Highlights:

A. Assessment for Q1: 2020-21

• Manufacturing companies assessed faltering of major demand indicators like production, order books and employment conditions in Q1:2020-21; the perception of external demand conditions was also pessimistic.

• Sentiment for overall financial situation was negative, largely driven by downfall in internal accruals.

• Cost pressures stemming from interest payments on borrowings and purchase of inputs were assessed to soften; salary expenses also eased.

• Respondents polled reduction in selling prices and plunge in profit margins.

• The Business Assessment Index (BAI)² fell sharply to all-time low at 55.3 in Q1:2020-21 from 102.2 in the previous quarter.

B. Expectations for Q2: 2020-21

• Manufacturers expected improvements in production and order books in Q2:2020-21; the sentiments on job landscape and external demand, however, remained weak.

• Outlook on overall financial situation portrayed some optimism.

• Respondents tempered their expectations on selling prices on the back of lower cost burdens from inputs and salary outgo.

• Sentiments on profit margins remain highly negative during Q2:2020-21 also.

• The business expectations index (BEI) dipped into contraction zone and stood at 99.5 for Q2:2020-21.

C. Expectations for Q3:2020-21 and Q1:2021-22

• Manufacturers polled distinct betterment in key demand indicators in Q3:2020-21 sustaining through Q1:2021-22.

• Overall business situation is expected to gradually improve by Q1:2021-22.

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 April 24, 2020 and results were compiled with data received till June 30, 2020. The results of the 89th round of the survey (Q4:2019-20) were released on April 3, 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 indicator for is calculated as a weighted net response of nine business indicators, weights being the share of industry groups in gross value added (GVA). The nine indicators 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.