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A day after official data showed core sector growth is moving at a snail's pace, the widely-tracked HSBC India purchasing managers' index (PMI) for manufacturing further came closer to contraction at 50.1 points in July, down from 50.3 in June. With this, the index is back to the level in May, when it was at a 50-month low. This heralds more bad news for India’s manufacturing sector.
As the rupee keeps depreciating against the dollar, firms refrained from building inventories. Leif Eskesen, HSBC’s chief economist for India and Asean, believed the Reserve Bank of India’s short-term measures to choke liquidity to arrest the rupee slide may not be withdrawn any time soon.
After inching up in June, the manufacturing growth barely managed to remain in the growth trajectory. A reading above 50 points indicates growth, while a below 50 reading signifies a contraction.
“The latest reading was indicative of a broad stagnation of manufacturing operating conditions in India,” said Markit Economics, the financial information firm that compiles the PMI.
The PMI figures assume importance since official data showed on Wednesday that the eight core industries grew at an almost stagnant pace of 0.1 per cent in June this year compared with 7.9 per cent growth in June 2012. This may drag down industrial growth in June as core sector has almost 38 per cent weight in the Index of Industrial Production (IIP). In May, IIP fad fallen 1.6 per cent. June figures are expected next week.
Manufacturing output, one component of PMI, continued to fall for the third consecutive month in July due to declining new orders, tough economic conditions and shortage of raw material. However, the rate of decline was not as much as it was in June. “Activity in manufacturing sector was broadly flat in July. Output fell by less, but orders flows weakened, led by slower growth in export orders,” said Eskesen.
New export orders rose during July, which took the current expansionary sequence to 11 months. The panel members involved in the research process stated there was foreign demand, but due to increased competition export business growth was "modest and the weakest in three months".
Also, the quantity of items purchased continued to rise in June, hence continuing a 52-month growth. However, it was the slowest in this month. Of the three monitored sub-sectors, only one - consumer goods - registered higher buying activity, the firm said in its monthly report.
Markit Economics also stated that due to depreciating value of the rupee, vendors were reluctant to import raw materials. Thus, stocks of purchases fell for the first time, albeit slightly, since April last year.
It also pointed out that inflationary pressures sustained in July and output prices rose at the fastest rate since February. Also, due to higher prices of metals, chemicals and plastic, among others, the overall input prices rose sharply in July, and “at the strongest rate in 10 months”. However, there was a modest expansion in the rate of job creation.
According to Eskesen, the data could limit RBI’s scope of a rate cut and the recent liquidity tightening measures taken by RBI will not be rolled back anytime soon. “The data suggests that the RBI will likely have to keep policy rates on hold for a while given lingering inflation risks and that the recently-introduced currency stabilisation measures will not be lifted anytime soon,” said Eskesen.
Key takeaways
# Operating conditions broadly unchanged since June
# Third consecutive decline in production volumes
# New orders decrease, but exports rise for eleventh month running
| Month | Manufacturing PMI (in points) |
| Oct-11 | 52 |
| Nov-11 | 51 |
| Dec-11 | 54.2 |
| Jan-12 | 57.5 |
| Feb-12 | 56.6 |
| Mar-12 | 54.7 |
| Apr-12 | 54.9 |
| May-12 | 54.8 |
| Jun-12 | 55 |
| Jul-12 | 52.9 |
| Aug-12 | 52.8 |
| Sep-12 | 52.8 |
| Oct-12 | 52.9 |
| Nov-12 | 53.7 |
| Dec-12 | 54.7 |
| Jan-13 | 53.2 |
| Feb-13 | 54.2 |
| Mar-13 | 52 |
| Apr-13 | 51 |
| May-13 | 50.1 |
| 13-Jun | 50.3 |
| July'13 | 50.1 |
Source: Markiteconomics
