Manufacturing hits a bump in August: PMI

Poor employment and price pressures might work against a rate cut by the Reserve Bank of India

Growth in India’s manufacturing sector slowed in August compared to July, showed the HSBC Purchasing Managers’ Index (PMI).

While employment was down marginally, the second consecutive month of a decline, price pressures were high. These factors might work against a rate cut by the Reserve Bank of India.

In August, the PMI declined to 52.4 points from July’s 17-month high of 53 points. A reading of more than 50 shows expansion. August was the 10th  consecutive month of growth in the manufacturing sector. “Manufacturing activity moderated, following a spurt in the previous month,” said Frederic Neumann, co-head, Asian economic research, HSBC.

The data came a few days after official figures showed the manufacturing segment had expanded 3.5 per cent in the June quarter, after two consecutive quarters of contraction. For the June quarter, growth in gross domestic product was 5.7 per cent, against 4.6 per cent in the previous quarter.

Even as growth in manufacturing moderated in August, activity in the segment was robust, said Markit Economics, the financial information firm that compiled PMI data. The index is based on a survey of about 500 private firms.

Within manufacturing, the consumer goods segment fared the best, while business conditions in the capital goods category deteriorated. The Index of Industrial Production had shown capital goods production surged 13.9 per cent in April-June, while the consumer goods space had contracted 2.1 per cent.

The PMI data showed in August, manufacturing companies’ output rose for the 10 th  consecutive month and the most since February 2013. New orders increased for the 10 th  straight month. New export orders, too, rose. The firms surveyed pointed to strengthening demand from key export clients as the primary reason behind the rise in foreign orders.

According to official figures, export growth in July stood at 7.33 per cent, against double-digit expansion in the two previous months. Data on export in August will be announced later this month.

Meanwhile, input stocks and post-production inventories of Indian manufacturers increased in August. Some indicated stocks were increased to address the rise in new orders. Stocks of purchases and finished goods increased in two of the three surveyed categories, with the exception of investment goods.

“The mood remains positive, with firms accumulating inventory in response to stronger demand,” Neumann said. In August, input costs rose sharply, though the rate of rise in these prices was lower than in July. Factory-gate prices, too, increased. “Price pressures remained elevated, despite the slight deceleration in input prices. This is likely to keep the central bank guarded against inflation risks, particularly from the pick-up in demand.” Neumann said.

 

Despite pressures from many quarters, RBI has not cut the policy rates as it thinks that its target to bring the retail price inflation down to 6% by 2016 from close to 8% in July this year faces current faces upside risks.