Manufacturing activity shrinks for first time in over 4 years

PMI dips to 48.5, lowest no in four-and-a-half-years, on decline in new orders

After a depressing four-year low Gross Domestic Product (GDP) growth of 4.4% in first quarter of 2013-14, there is more bad news in store.

The manufacturing sector deteriorated for the first time in almost four years in August, according to widely-tracked HSBC Purchasing Managers' Index (PMI) released today.

The PMI for manufacturing fell to 48.5 points in August from 50.1 points in July, indicating a contraction in the sector. A reading above 50 points indicate and growth and that below 50 points depict contraction.

This is for the first time since March 2009 that the sector has witnessed contraction and is the lowest number in four-and-a-half years.

"Manufacturing activity contracted in August for the first time since March 2009. This was led by a decline in new orders, especially export orders", said Leif Eskesen, Chief Economist for India & ASEAN at HSBC.

Fragile economic conditions and subdued client demand led to strong fall in the new orders placed at Indian manufacturers this month, the report said. Not only this, but the rate of contraction accelerated to the fastest since February 2009.

The export orders also declined for the first time in 11-months in August. Consumer goods producers registered a slight decline despite expectations of a rise considering the upcoming festive season.

New business from abroad also fell, ending an 11-month sequence of growth.

"Indian manufacturers reduced their production volumes for the fourth consecutive month in August and at the fastest rate in four-and-a-half years", said Markit Economics which compiles the data.

However, there was subdued inflation in input and output prices. "Encouragingly, input and output price inflation slowed despite the weakening of the currency, which likely reflects the softening demand conditions and, therefore, declining pricing power", said Eskesen.

He added that the RBI will likely keep its liquidity tightening measures in place due to depreciating rupee against dollar.