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Worsening demand conditions to hit Mfg

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CIOL Bureau
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BANGALORE, INDIA: An overwhelming 87 per cent of manufacturers expect the growth in their sector to moderate in the third quarter of 2011-12 compared to the same quarter last year, according to a survey.

The survey, conducted by the Federation of Indian Chamber of Commerce and Industry (FICCI), attributes this slowdown to the result of lower order books, moderate export growth and rising raw material costs.

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As many as 384 manufacturing units were polled in the survey which notes that worsening demand conditions for the manufacturing sector in Q3 compared with previous quarters is evident.

In the last two quarters (April-June 2011 and July-September 2011), over 50 per cent and 38 per cent respondents reported higher orders compared to the previous quarter, while in Q3 only 29 per cent respondents reported higher orders than in Q2 (July-September 2011).

The survey gauges the expectations of manufacturers for Q3 for major sectors such as textiles, capital goods, metals, chemicals, tyres, cement, consumer electronics, batteries, automotive, textiles machinery, leather and footwear, food processing etc.

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Capacity utilization falling: FICCI’s survey notes a significant fall in capacity utilisation in Q3 as only 36 per cent respondents said that their capacity utilisation levels are higher in Q3, compared to the prior year.

In the previous quarters, over 53 per cent respondents reported that they were operating at higher capacity as compared with the prior year. Capacity utilisation levels are particularly low in textiles, consumer electronics and the electrical sector.

Capacity addition - new investments falling significantly

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In the previous quarter, 41 per cent of respondents reported plans for capacity addition in the

next 6 months; in the latest survey only 32 per cent respondents have done so. They represent the following sectors: textiles, steel, capital goods, cement, electrical, automobile, autocomponents, chemicals, paper and textiles machinery.

The notable exceptions were food processing and leather; respondents from these two sectors anticipate fresh investments in the coming months.

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Employment- outlook worsens

Sixty six percent of respondents reported that they are not planning to increase their workforce in the next three months as compared with the 57 per cent in the previous survey. The food processing and leather sectors are the exception because employment prospects have improved.

Exports- outlook bleak

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FICCI’s survey also shows that growth of manufacturing exports was expected to moderate in Q3 as only 29 per cent respondents expect their exports to rise in the quarter, compared to about 40 per cent in the earlier survey.

Sectoral growth

Based on expectations in different sectors, the survey points out that nine out of 13 sectors were likely to witness low (less than per cent per cent) to moderate (between per cent to 10 per cent) growth in Q3. These sectors are cement, steel, textiles, chemicals, capital goods, paper and electricals. Sectors such as automotive, auto-components, leather and food processing and miscellaneous are likely to witness strong growth of more than 10 per cent in Q3.

The slowdown is a result of moderation in consumer demand, rise in raw material prices and weakening of the export market. Fifty six per cent of respondents expect rising cost of raw materials to persist and pose a significant constraint; as a result, profit margins are likely to come under pressure in Q3.