Mumbai: Corporate production capacities are at a two-year high with a clear momentum to go higher indicating that economic growth is likely to pick up and company profitability will improve in the next few months, economists said.
Data released by the Reserve Bank of India says that capacity utilisation at 75.2 per cent in the quarterended March 2018, the highest since 75.5 per cent recorded in March 2016. Capacity utilisation is a key indicator of demand in the economy. A number close to 100 per cent indicates full-capacity utilisation, which may lead to more corporate investments.
Economists say that the secular uptick in capacity utilisation in the past few months is noteworthy because it means companies are now more likely to make new investments. “We can collaborate it by the demand seen in sectors like steel, cement and automobiles. The trend is clearly upwards and even if things pause due to elections next year or due to corporate deleveraging, it is likely on the way up,” said DK Joshi, chief economist at Crisil.
Data from Crisil shows utilisation in commercial vehicle, cars, twowheelers, tractors, cement and steel industries has risen in the past three years and projected to rise further in the current fiscal. Economists, however, caution that corporate capacities are still far away from the 83.2 per cent recorded in March 2011, the highest in the current series of data.
“There is a moderate improvement which is encouraging but we must not celebrate too early. I am still cautious because global uncertainties and other domestic headwinds like elections and a banking sector clean up could delay investments. I expect investments to come back in 2019 rather than 2018,” said Anubhuti Sahay, chief India economist at Standard Chartered.
Higher capacity utilisation could also mean pricing power returning to companies and likely higher inflation. “We are already seeing pricing power returning to sectors like auto ancillaries, steel, industrial bearings, highway construction and railway electrification. This is being driven by government spending but will lead to higher demand for the private sector,” said Saugata Bhattacharya, chief economist at Axis Bank.
Bhattacharya expects inflation to rise in the second half of the fiscal year led by higher food and fuel prices and as a favourable base effect will wean off. He predicts that the RBI will hike its benchmark rate at least twice more taking the repo rate to 7 per cent.