Rising Inventories on Falling Exports in India

Indian factories have an inventory problem. Since October 2020, the manufacturing sector in India has registered strongest improvement in May 2023. As per the S&P Global report, published in the first week of June, better supply chain and increase in inputs buying boosted production and inventory growth. The report also stated that May was the 23rd consecutive month of growth in manufacturing. 

The Ministry of Statistics and Programme Implementation (MOSPI), Government in India, has announced that stocks of goods held by firms in India has increased by Rupees 35,954 crores (359.54 billion) in the first quarter of 2023. On top of this, data from the Ministry of Commerce reveals that exports are down by 9.44 percent for the first four months of 2023 as compared to the same period last year. 

Data Source: MOSPI 

Manufacturing Capacity Utilisation 

Manufacturing facility capacity utilisation increased from 74 percent in second quarter to a strong 74.3 percent in the third quarter of FY23. Since the third quarter of FY22, utilisation has remained over the 72-percent threshold, indicating that industrial activity is progressing quickly. In the first quarter of FY20, the pre-pandemic manufacturing capacity utilisation level was 73.6 percent. 

Fall in Global Producer Prices 

In recent months, a shift in pricing power from the seller to the buyer because of declining demand and expanding supply has lowered prices along global supply chains. The first decrease in producer input prices in three years has also been facilitated by decreasing energy and shipping costs.

Even though it was only slight, the decrease in input costs and selling prices in May stands in stark contrast to the high rates of inflation experienced at this time last year, which is encouraging for the likelihood that reduced goods prices will translate into lower consumer price inflation. 

India’s Auto Exports in Slow Lane 

As passenger vehicle exports from India grew by 14.71 percent in FY 2023, all other vehicle categories registered fall in numbers as compared to last fiscal year. The Society of Indian Automobile Manufacturers (SIAM) reported that total vehicle exports for FY 2023 were down by 15.24 percent at 47,61,487. The volumes were strikingly low in the three-wheelers and two-wheelers category, which were down by 26.85 percent and 17.80 percent, respectively. 

Data Source: SIAM 

Recession in Germany 

The recession in the German economy would undoubtedly affect Indian exports, especially those to the largest economy in the European Union that are in the garment, footwear, and leather goods sectors. Exporters are worried about the effects this recession will have on India's exports, not just to Germany but also to other European nations that are going through a recession. 

The long-term crisis in Germany would lead to a fall in Indian exports, with leather goods, chemicals, and light engineering items being the most impacted industries. India exported 10.2 billion dollars' worth of goods to Germany in the fiscal year 2022–2023; however, given the present recession, this quantity is anticipated to decline. 

Supply Up and Demand Down

Leading indicators of demand conditions indicate that the current global expansion may slow down. The production surplus compared to new order inflows has been made possible by manufacturers clearing out work backlogs from earlier periods, often during the pandemic's peak. Backlogs of work at manufacturers reached new heights in 2021–22 mostly because of supply chain snags and a lack of essential inputs.

As a result of improved supply chains, which have allowed for more manufacturing capacity, these backlogs have now been decreasing for a year. Shipment delivery times from suppliers, which at the height of the epidemic increased to record levels, have now been decreasing for months, signalling the most pronounced improvement in global supply chain. 

Growth Prospects 

The World Bank estimates that the global economy, which expanded by 3.1 percent last year, is predicted to grow in 2023 by just 2.1 percent while monetary policy is kept tight to contain excessive inflation, before making a modest comeback in 2024 to reach 2.4 percent. The growth estimate for India has been lowered to 6.3 percent in FY 2024. 

The expansion of emerging market and developing economies is anticipated to be hampered by the tight financial conditions around the world and the weak external demand. If longer-term inflation expectations remain fixed, inflation is expected to steadily drop as demand declines and commodity prices flatten. In the event of a more widespread banking sector stress or if prolonged inflation pressures result in tighter-than-expected monetary policy, global growth may be less than predicted. 

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