Manufacturing activities contracted to an eight-and-a-half-year low in July following the goods and service tax (GST) roll-out, showed the widely-tracked Nikkei Purchasing Managers’ Index (PMI) on Tuesday. This led to cutting of jobs, albeit marginally.
Experts said the Reserve Bank of India
(RBI) will cut repo rates by at least 25 basis points on Wednesday to spur industrial activity.
stood at 47.9 points in July, down from 50.9 in June. A reading above 50 indicates expansion, while one below it shows contraction. Factory activities had earlier fallen in December 2016 after demonetisation.
Implementation of the GST is responsible for the latest PMI numbers, which led to outputs, new orders and purchasing activity, all seeing their steepest fall since early-2009, Pollyanna De Lima, principal economist at IHS Markit
— which compiles the data — and author of the report, said.
Consequently, companies purchased fewer quantities of inputs for use in the production process, leading to an overall decline in holdings of raw materials and semi-finished items.
Incoming new work saw the steepest fall in the year-to-date since early 2009. Different to the trend for total order books, new export orders continued to rise in July. That said, the rate of expansion softened from June’s eight-month high.
Also, the Index of Industrial Production (IIP) figures showed a low growth of 1.7 per cent in May. It had been 3.1 per cent in April, when economists had talked of lagged effects of demonetisation.
The forecast for June data was also expected to be dim, India Ratings chief economist Devendra Pant said.
Even retail inflation — which fell to a five-year low of 1.5 per cent in June — is expected to remain subdued over the coming months. This has prompted economists to believe that the RBI
will loosen its monetary stance on Wednesday.
“The weakening trend for demand, relatively muted cost inflationary pressures and discounted factory gate charges provide powerful tools for monetary policy easing, which has the potential to revive economic growth,” de Lima added.
“While we expect the RBI
to cut down rates by at least 25 bps, the willingness of the banks to pass on that to the consumers will show whether the move bears any result,” Pant said.
While a rate cut would have an immediate impact on the consumer side with consumer durables, auto and housing sectors getting a boost, long-term solution would be to improve the complete cave in of industrial demand, Pant added.
Within GDP, manufacturing growth declined to 5.3 per cent in the fourth quarter of 2016-17, from 8.2 per cent in the third quarter. GDP
data for the first quarter of FY18 will come by this month-end and would reveal whether the effect of demonetisation
and that of de-stocking due to GST still prevailed.