PMI manufacturing slows to four-month low in June over GST roll-out jitters

Water scarcity also slows down growth; strong foreign demand for Indian products in June

Fear of uncertainty over the implementation of the Goods and Services Tax (GST) has cast its shadow on manufacturing activities as growth in the sector fell to a four-month low in June, showed the widely-tracked Nikkei purchasing managers' index (PMI). Water shortages in some parts of the country also led to the slowdown in growth.

However, the author of the report, Pollyanna De Lima, did not expect GST to derail consumer demand. Coupled with demonetisation's impact largely being over, Lima projected India's economy to grow 7.3 per cent in 2017-18, a bit higher than 7.1 per cent in the previous year.

Down from 51.6 points in May to 50.9 in June, the PMI pointed to a slight and weaker improvement in the health of the sector. It should be noted that PMI in June was less than one percentage point above the 50-point mark, which demarcates expansion from contraction.

Nevertheless, the headline figure averaged 51.7 during the April to June quarter, above the one seen in Q4 FY17 (51.2). This means that manufacturing growth could be higher in Q1 of FY18 than what was witnessed in the GDP data of the fourth quarter of the previous financial year. 

However, there are differences between PMI and official data as the former is just a survey and also takes into account order books.

Output across the manufacturing economy rose for the sixth month in a row during June, which the survey participants linked to ongoing increases in client demand. That said, challenging economic conditions, water shortages, and the upcoming implementation of GST, hampered growth.

Lima, an economist at IHS Markit, said,"For the third month in a row, production growth in India eased during June. The slowdown occurred due to weak client demand, with order books up at a slight and softer pace. In many cases, businesses indicated that growth was held back as a reflection of water scarcity and the impending introduction of GST."

While the monsoon is progressing well, there is deficient monsoon in some parts of the country such as Vidarbha and northern Karnataka. It was also deficient in central India in the initial phase of June.

Looking ahead, manufacturers in India forecast output growth in the coming 12 months, with optimism supported by new developments and anticipation of higher demand stemming from lower tax rates.

However, some companies mentioned that the implementation of the GST Bill would have a negative impact on their businesses.

"Confidence towards future performance was mixed among goods producers. While the new tax system is anticipated by some firms to generate more business, others expect the GST to have a detrimental impact on their order books," Lima said.

On a more cheerful pitch, the PMI survey showed strong foreign demand for Indian-manufactured products in June. New orders from external markets increased at a solid rate that was the most pronounced in eight months.

Merchandise exports have been growing for eight straight months and the expansion stood at 8.3 per cent in May.

Input costs continued to increase, with anecdotal evidence pointing to higher prices for chemicals, food, plastics, and rubber. However, the rate of inflation was modest and the weakest since August 2016. Likewise, output charges rose only slightly and at a below-trend pace.