Manufacturing expands fastest in six months

HSBC Purchasing Managers’ Index rises to 58.4 in November

Manufacturing grew at the fastest pace in six months in November, as the order flow continued to improve, adding optimism to India’s growth prospects for the current year.

The HSBC Purchasing Managers’ Index (PMI), which measures the growth of Indian manufacturing on a monthly basis, reached a six-month high of 58.4 in November, from 57.2 in October. The index had indicated a marginal deceleration in manufacturing activity in September, but that had picked up on the back of increased orders in October and November.

“The momentum in manufacturing picked up further in November. Output accelerated and growing order books point to a continued strong momentum in the months ahead,” said HSBC Chief Economist (India and Asean) Leif Eskesen.

The PMI numbers came a day after government figures showed that India had grown at 8.9 per cent in the second quarter of the current financial year, beating projections and estimates and kindling hopes of a 9 per cent growth in 2010-11.

New orders grew at the strongest rate in four months and companies also reported a significant rise in new export business during the month. Growth in export orders rose sharply from October’s eleven-month low to grow at the fastest rate since January.

“The encouraging thing is that exports have done well. Domestic production is also doing well and it is primarily because of the increase in orders during the festive season. I think, going by the numbers, the extent of deceleration we were expecting in industrial production was slightly exaggerated,” said YES Bank chief economist Shubhada Rao.

However, on the flip side, companies reported capacity constraints as backlogs of work continued to increase with November’s accumulation of outstanding business, in line with the series high recorded in June. Stocks of finished goods rose for the second successive month, but the increase was marginal and post-production inventories remained unchanged from the previous month’s level.

“A spike in the backlog of works suggest tight capacity, which, together with rising input and output prices, underscores the need for continued monetary policy tightening by the Reserve Bank of India,” added Eskesen.

Adding to capacity concerns, despite the increase in new orders and output during the month, employment in manufacturing sector decreased marginally. While some companies were aiming to increase employment to boost capacity levels, other companies were finding that attrition was high due to higher wages elsewhere.

Input prices, which had been on the rise for the past six months, continued to rise in November. An increase in raw material prices drove costs upwards at the highest pace in six months.