Manufacturing Output growth eases for second month running: Nikkei India Manufacturing PMI

India Manufacturing PMI edged higher to 50.7 in May 2016 from 50.5 in April 2016

Business conditions across India's manufacturing industry improved for the fifth straight month in May. Whereas new orders expanded at a faster pace, the upturn in output softened. In both cases, rates of growth were well below trend. New export orders fell for the first time in 32 months. Encouragingly, businesses took on additional workers and bought more inputs for use in the production process. Price indicators varied. While cost inflation climbed to the strongest since March 2015, charges were raised at a weaker pace.

The seasonally adjusted Nikkei India Manufacturing Purchasing Managers IndexTM (PMI)TM edged higher in May, posting 50.7 (April: 50.5). This latest above-50.0 reading highlighted an overall improvement in operating conditions, the fifth in as many months, but one that was marginal overall.

Following broadly stagnant levels in April, order book volumes increased during May. The pace of expansion was, however, only slight and well below its long-run average. Data implied that growth was centred on the domestic market, as new business from abroad decreased. The latest drop in new export orders was the first since September 2013, with survey participants commenting on subdued global demand.

Goods producers raised their output volumes for the fifth successive month in May, but to the least extent in this sequence. Whereas higher production was associated with an increase in order books, there were mentions that growth was hampered by the assembly elections in certain regions.

PMI data indicated that Indian manufacturers had sufficient resources to work on existing projects, as outstanding business declined in May. Contributing to the overall decline in backlogs was an expansion in workforce sizes. The rate of job creation was, however, only marginal.

Amid reports of higher prices paid for a range of raw materials, average cost burdens rose further in May. The rate of inflation was in fact the most pronounced since March 2015. Although firms passed on to their clients part of the additional increase in costs by way of raising selling prices, the rate of charge inflation eased to the weakest in the current three-month sequence of increases.

Manufacturers purchased more inputs during May, taking the current sequence of expansion in buying levels to five months. Concurrently, pre-production inventories rose again, albeit marginally. In contrast, holdings of finished goods decreased for the eleventh successive month, which some respondents linked to the fulfillment of orders from stocks.

Sub-sector data highlighted intermediate goods as the best performing category in May, where growth rates for new orders and output were stronger than those seen among consumer goods producers. Investment goods firms, in contrast, saw further declines in new work and production.

Commenting on the Indian Manufacturing PMI survey data, Pollyanna De Lima, Economist at Markit and author of the report, said: "Signs of challenging economic conditions in the Indian manufacturing sector were evident in May, with output losing further growth momentum. The headline PMI remained in expansion territory, but recorded one of its lowest readings since the end of 2013, suggesting that the sector is barely improving.

"Although new orders rose further, the rate of expansion was well below the long-run survey average and new business from abroad, in fact, declined. Subdued demand and an increasingly competitive environment appears to have restricted pricing power among goods producers, as output charges were raised only marginally despite cost inflation climbing to a 14-month high.

"So far, there is little evidence that the latest cut in the benchmark rate acted to significantly improve business conditions for manufacturers. Therefore, further stimulus may be necessary to shift the economy into a higher gear."

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