The slide in the index is not a reason to get worried, as it was perched on a high for a long time.
The global markets are tense. The HSBC Markit Purchasing Manager’s Index (PMI), which indicates the level of economic activity, has been sliding across key Asian countries, including India. While the levels in China are seen as uneasy, economists reckon it is too early for Indians to get perturbed.
The PMI, when above 50, indicates economic expansion. Below that, it depicts contraction. The Chinese PMI fell to a 14-month low of 50.4, just a shade away from the dividing barrier. The Indian PMI came in at 57.3 in June, lower than 59 in May. However, there is no reason to get worried, as it was off the 27-month high it recorded in May. There has been some easing since then, but it is still in the expansionary mode and far from the sub-50 levels.
Among the components of the PMI, manufacturing output and new orders continue to show strong expansion and have remained above 60. It was the more volatile employment index that fell below 50 and prompted the decline in PMI.
Economists at Goldman Sachs pointed that input and output prices continued to rise, but at a slower pace, after several months of extremely sharp increases. They said, “Domestic demand continues to remain strong. Other activity indicators like the January-March quarter gross domestic product growth, core wholesale price index in May, motor vehicle sales and non-oil imports continue to signal strength in domestic demand.” While there are concerns of domestic demand being uncertain in places like China, the fundamental driver in India remains strong. “Overall, both activity and price components are easing from elevated levels, suggesting it is too early to worry about growth and let down our guard on underlying price trends,” said Frederic Neumann, co-head of Asian Economics Research, HSBC.
However, this could be an early warning signal. The credit offtake has been sluggish and most of the disbursals has been concentrated on the 3G side. Hence, one should watch out for the credit spread across sectors. Moreover, short-term rates have hardened by around 150 basis points, which will affect corporates seeking short-term funding for expansions. This might have a severe impact in times to come. Till then — all is well.
