Manufacturing, services PMIs continue to contract in Oct

Rising input costs and a fall in domestic demand indicative of stagflationary conditions

Foreign investors may have turned bullish on India, leading to upgrades in the country’s investment status, but little has changed as far as the stress in the economy is concerned. High input costs, sluggish demand and poor pricing power continue to plague India’s manufacturing and services sectors. HSBC’s purchasing managers’ index (PMI) data for India — which tracks business conditions by surveying companies on new orders (domestic and exports) booked, employment, inventory levels and delivery times for manufacturing and services — doesn’t appear promising. India’s manufacturing PMI in October was at 49.6. Economists say the forward-looking indicators are not very promising.

While October’s PMI data for manufacturing shows a pick-up in export orders, thanks to a weak rupee and better demand in global markets, domestic orders have remained below the 50-mark for the fifth straight month. Inventories have risen even as new orders have fallen.

Sonal Varma, economist at Nomura, says: “The new orders-to-inventory ratio fell to 0.94 in October — the lowest since January 2009 — from 0.98 in September, suggesting scope for manufacturing output to be cut further as firms may need to de-stock inventory if demand does not recover.” Another factor suggesting stress in the system is the build-up in order backlog, which has risen from 50.7 in September to 52.6 in October. Economists claim producers continue to be impacted by power cuts across the country, leading to a build-up in order backlog. The input price index also hit a 16-month high of 64.5 in October from 63.5 in September, which implies the weak rupee is pushing up costs. This is interesting as the rupee has appreciated since September and yet the input cost pressures persisted in October, indicating a broader price pressure on manufacturers. What this indicates is despite slowing consumption, price pressures remain, which is suggestive of stagflationary conditions.

For the services sector, the contraction was at a much slower pace than what has been seen in manufacturing. The headline index for services rose from 46.1 to 47.5 in October, signalling a moderate and slower drop in private sector business activity. Output fell at a slower rate across the service sector. However, for the fourth straight month, output for the services sector contracted, which is not a very positive sign.

Leif Eskesen, chief economist for India & Asean at HSBC, says: “The continued contraction in service sector activity is testament to the dampening effects of the heightened macroeconomic uncertainty. While activity readings may be stabilising, a notable recovery is not in the cards for a while still.”