India: Capacity utilisation in perspective – Nomura

Analysts at Nomura note that India’s capacity utilisation in the manufacturing sector was cited as “robust” in the August monetary policy statement.

Key Quotes

“In fact, all six monetary policy committee members cited rising capacity utilisation as a reason for their vote to hike in June.”

“India’s capacity utilisation data have a limited history (Q2 2008-Q1 2018), so to measure beyond its availability, we use the RBI’s industrial outlook survey, which includes a question on the assessment of capacity utilisation.”

“Two aspects standout out from our constructed time series on capacity utilisation. First, we estimate that capacity utilisation (seasonally adjusted) remained broadly unchanged at 72.3% in Q2 2018. Second, even as capacity utilisation has picked up from the 2016-17 lows of ~72%, it remains significantly below the levels (~78%) seen during 2004-07.”

“In our view, still-low capacity utilisation is one of the reasons why investment may take time to fructify, as the initial burst of demand will likely be met by sweating the (existing) assets, rather than building new capacity.”