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India’s domestic factory orders and production contracted for the first time in 11 months in June as restrictions to contain the Covid-19 pandemic put manufacturing into “reverse gear”.
The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.1 in June from 50.8 in May, moving below the 50-level separating growth from contraction.
The factory output averaged 51.5 in the opening quarter of 2021-22, the lowest three-month figure since the year-ago quarter, according to the survey.
“The intensification of the Covid-19 crisis in India had a detrimental impact on the manufacturing economy,” said Pollyanna De Lima, economics associate director at IHS Markit. “Growth of new orders, production, exports and input purchasing was interrupted in June as containment measures aimed at bringing the pandemic under control restrained demand. However, rates of contraction were softer than during the first lockdown.”
New order growth that started in August 2020 ended in June, with firms linking the deterioration in demand to the pandemic. The pace of contraction, however, was much softer than what was registered at the onset of Covid-19 last year, it said.
The survey highlights that weakness in demand and a reduction in production requirements led firms to restrict input purchasing in June. Buying levels fell at a marked pace that was among the fastest seen since data collection started in March 2005.
“The dip in the June PMI is somewhat at odds with the mostly positive high-frequency data available so far. While diesel consumption has contracted on a year-on-year basis in June, this is likely to be on account of high prices diverting some freight to the railways,” said Aditi Nayar, chief economist, ICRA.
Following the phased unlocking, goods and services tax (GST) e-way bills, vehicle registration, electricity demand, and petrol consumption have all reported a sequential improvement over May and growth in June.
On the job front, companies were at their least optimistic for almost a year. “As a result, jobs continued to be shed midway through the year. The fall in employment was marginal, but took the current sequence of month-on-month contraction to 15 months,” said the report.
De Lima said companies became increasingly worried about when the pandemic would end, which resulted in downward revisions to output growth projections. As a result of subdued optimism, jobs were shed again in June.
“Out of the three broad areas of the manufacturing sector monitored by the survey, capital goods was the worst affected in June. Output here declined at a steep rate due to a sharp fall in sales,” De Lima said.
Falling new orders, business closures, and the Covid crisis triggered a reduction in output among Indian manufacturers. The decline was moderate relative to those seen in the first half of 2020, but ended a 10-month sequence of growth, the report said.
The June data pointed to marked declines in both pre- and post-production inventories. The former posted the first contraction in 10 months.
Amid reports of raw material scarcity, transportation issues, and states’ restrictions, supplier performance worsened again in June. However, average lead times lengthened only slightly.
Input costs increased further in June, with firms reporting higher prices for chemicals, electronic components, energy, metals and plastics. The rate of inflation was, however, the joint-lowest in five months (equal to May).
The PMI data is released monthly in advance of the comparable official economic data. It is compiled from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.
