Understanding Slack in the Economy: OBICUS

Group B5
Slack in Economy: Measure of the quantity of unemployed resources

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 & 𝑆𝑒𝑟𝑣𝑖𝑒𝑠 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑒𝑣𝑒𝑙𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑢𝑡𝑝𝑢𝑡 = 𝑺𝒍𝒂𝒄𝒌 𝒊𝒏 𝑬𝒄𝒐𝒏𝒐𝒎𝒚

Gap is Large Gap is Narrow

• High level of slack in economy • Low level of slack in economy
• Monetary policy should be • Monetary policy should ease to
aggressive prevent Overheating & Inflation
Slack in Economy: Key Performance Indicators

Capacity Utilization Order Books

Extent to which an enterprise or a Number of new orders along with

nation uses its installed productive backlogs and pending orders is a good
capacity indicator of demand in the economy

Finished Goods Inventory (FGI) to Sales Ratio Raw Material Inventory (RMI) to Sales Ratio

An increase in this ratio indicates An increase in this ratio indicates higher

higher production relative to the procurement of raw material relative to
level of sales the level of sales
 Capacity Utilization:

77.0

76.0

75.0 • Decrease from 76.01% to

73.60% in the previous
74.0
quarter
73.0
• Lower capacity utilization
72.0
reflects the higher cost-
71.0 structure of industrial
production and increasing
70.0
incremental capital-output
69.0 ratio (ICOR)
68.0

Capacity Utilisation
Source: RBI OBICUS Survey, Moody Analytics
Order Books:

300.0 40.0

250.0
30.0 • Decrease of 3.64% of sales from
previous quarter
20.0
200.0
10.0 • Decline in Average New Orders
by 8.2% (Q-o-Q), marking 3rd
150.0 0.0
successive quarter of decline
-10.0
100.0
• Decrease in Average Backlog
-20.0 Orders by 9.9% (QoQ)
50.0
-30.0
• Decrease in Average Pending
0.0 -40.0 Orders by 24.9% (QoQ)

Average New Order Book (% change) Average Backlog Order

Average New Order Book Average Pending Order
Source: RBI OBICUS Survey, World Bank Report
Finished Goods Inventory (FGI) to Sales Ratio:

70.0

60.0 • FGI to sales ratio rose for 2nd

consecutive quarter in Q1:2019
50.0

40.0

30.0

20.0
• Reflecting moderation in sales
10.0

0.0

Total Inv/Sales

Source: RBI OBICUS Survey, World Bank Report

Raw Material Inventory (RMI) to Sales Ratio:

30.0

25.0

20.0
• Rise in RMI to sales ratio was
15.0 on account of increase in
inventories and moderation in
10.0 sales
5.0

0.0

RM Inv/Sales
Source: RBI OBICUS Survey, World Bank Report
Automobile Sector: Slowdown

30

28 • Huge dips in vehicle sales

26 compared to 2018
24

22 • Lack of sales has led to,

20 Inventory pile up and hence
18 firms have rolled back
16
production
14
• Additionally leading to job
12
cuts
10

Domestic Vehicle Sales (in Lakhs)

Source: SIAM
Leading Indicators: Economic Context

Economy is going Slack has increased

significantly in the Aggressive
through a
last 2 quarters, as Monetary Policy
downward
business cycle inferred from prev.
slides
Recommendations: 25bps cut to decrease the new effective Repo
Rate to 4.9% from current 5.15%

• 5 successive rate cuts have already been done to boost the economy and stimulate growth

• Even then the economy has shown very limited signs of recovery

• A major cause for this is the lack of transmission of prior cuts from the banking sector to the

consumers (owing to stressed assets in the banking sector)

• Effective 01.10.19, transmission of rate cuts was made mandatory

• The further 25bps cut will help in reviving economic demand and in turn lead to more

production, lower inventories and higher sales

Thank You
Annexures: Consumer Confidence Index

Source: Trading Economy, RBI – Consumer Confidence Survey

Annexures: Business Expectation Index

Source: CEIC, RBI