Factory PMI up but remains weak as orders shrink

At 50.3 in June; export orders come in at a faster pace last month but domestic demand takes a hit from faltering economy

Indian factory activity remained weak in June as output contracted for the second month running and order books shrank for the first time in over four years, a survey showed on Monday.

 

The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, edged up to 50.3 in June from 50.1 in May.

 

The index, which gauges business activity in Indian factories but not its utilities, has been flirting with the 50 mark that separates growth from contraction for two months but has held above it for over four years.

 

"Manufacturing activity was broadly flat in June. Output continued to contract due to power shortages, albeit less so than last month. Moreover, new orders contracted led by weaker domestic demand," said Leif Eskesen, a chief economist at HSBC.

 

Total new orders fell for the first time since March 2009 during June, although marginally. Panel members commented that economic conditions in India were fragile, resulting in lower demand. There were also reports of increased competition for new work.

Export business, however, rose at the sharpest rate since January as demand from key foreign clients strengthened. Orders from abroad expanded at consumer and intermediate goods producers, but in the investment goods sector a decline was registered.                        

Reduced output levels were recorded for the second month running in June, amid evidence of tougher economic conditions and persistent power cuts. That said, the overall pace of contraction was slight and eased since May.

Production fell across all three monitored sub-sectors, with the fastest decline recorded among consumer goods producers.      

Nevertheless, the quantity of items purchased for production rose in June, taking the current expansionary sequence to 51 months. The rise in input buying was solid, and picked up pace since May. Surveyed firms reporting higher buying activity linked this to increased foreign demand and forecasts of better economic conditions in the coming months.     

On the price front, input cost inflation accelerated to the sharpest since February. Monitored companies indicated that raw material prices in general had increased over the month, with some comments of unfavourable exchange rates. After discounting their prices charged in the previous month, manufacturers attempted to pass on to their clients their increased cost burden during June. The rate of charge inflation was, however, modest as competition for new work persisted and weighed on pricing power.

Amid reports of power, raw material and water shortages, backlogs of work were accumulated again in June. Sharp rises were registered across all three monitored sub-sectors. Subsequently, manufacturers added to their workforce numbers in June. A lack of labour availability, however, restricted hiring. Whereas job creation was recorded in the intermediate and consumer goods sectors, a moderate contraction was registered at investment goods producers.

June data highlighted further accumulations of both pre and post-production stocks. Holdings of raw materials and semi-manufactured goods, nonetheless, increased modestly with panellists citing a scarcity of key raw materials.