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Manufacturing capacity utilisation declines to 68.9% in Q2FY20, lowest since 2008

India's manufacturing sector capacity utilisation nosedived 68.9 per cent in the September quarter (Q2FY20), hitting its lowest level since 2008. The capacity utilisation stood at 73.7 per cent in April-June quarter of 2008 (Q1FY18). This clearly indicates the severity of the ongoing slowdown in manufacturing sector and weak demand environment.    

Data released by the Reserve Bank of India (RBI) showed that capacity utilisation was at 73.6 per cent in June quarter (Q1FY20). In January-March quarter of 2019, corporate production capacity had improved gradually to a six-year high of 76 per cent from 71 per cent during demonetisation. 

Capacity utilisation is a measure of the extent to which an enterprise uses its productive capacity and is also a key indicator of demand in the economy. A figure close to 100 per cent signals full-capacity utilisation, which may lead to pick up in corporate investments and its profitability.

"The slowdown in manufacturing activity was also reflected in the decline in capacity utilisation to 68.9 per cent in Q2FY20 from 73.6 per cent in Q1 in the early results of the Reserve Bank's order books, inventories, and capacity utilisation survey (OBICUS)," the RBI said in its fifth bi-monthly monetary policy statement.

As per the data, seasonally adjusted capacity utilisation fell to 69.8 per cent in Q2FY20 from 74.6 per cent in the previous quarter.

"Growth in the services sector moderated, weighed down mainly by trade, hotels, transport, communication, broadcasting services and construction activity. However, growth in public administration, defence and other services accelerated in line with the surge in government final consumption expenditure," the statement said.

On a quarterly basis, the Index of Industrial Production (IIP) contracted by 0.4 per cent during July-September quarter (Q2FY20), compared to 3 per cent expansion in Q1FY20 and 5.3 per cent growth in the same quarter last year. Industrial output shrank to the lowest level in eight years to 4.3 per cent in September as compared to a contraction by 1.4 per cent in August 2019 and a growth of 4.6 per cent in factory output in the same month a year back. The data showed that all three broad-based sectors of capital goods production, consumer durables, and infrastructure and construction goods contracted.

Meanwhile, output of eight core industries - which constitute 40 per cent of the IIP -contracted for the second consecutive month in October, dragged down by coal, electricity, cement, natural gas and crude oil.

According to the early results of the Reserve Bank's industrial outlook survey, overall sentiment in the manufacturing sector remained in pessimism in Q3FY20 due to continuing downbeat sentiment on production, domestic and external demand, and the employment scenario.

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