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Manufacturing PMI slips to 28-month low in December

The sustained weakness in economic growth combined with controlled inflation could prompt the RBI to cut policy rates further

BS Reporter  |  New Delhi 

Manufacturing activity contracts in December

India’s manufacturing activity shrank for the first time in two years in December as business conditions deteriorated on account of Chennai floods besides the persistently muted domestic demand, a private survey showed on Monday. The sustained weakness in economic growth combined with controlled inflation could prompt the Reserve Bank of India (RBI) to cut policy rates further.

Snapping the 25-month growth sequence, the Nikkei India Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, fell to a 28-month low in December to 49.1 points from 50.3 in the previous month. The rate of contraction was the sharpest in seven years.

“India’s manufacturing sector took a turn for the worse at the year-end, with already-gloomy internal demand further hampered by floods in the south of the country… Such was the extent of the decline that the rate of reduction was the sharpest since the financial crisis,” said Pollyanna De Lima, economist at Markit and author of the report.

Meanwhile, China’s lower than expected PMI for manufacturing at 48.2 points in December led to a sharp fall in Indian markets and depreciation of rupee against the greenback on Monday. The rupee weakened 0.72 per cent against the dollar to close at 66.62 a dollar, its sharpest fall in nine weeks. The benchmark BSE Sensex slumped 2.05 per cent to close at 25,623 points, the biggest single-day percentage loss since September 22.

Manufacturing PMI slips to 28-month low in December
India’s economy expanded by 7.2 per cent in the first half of the current financial year prompting the government to cut the growth forecast to 7-7.5 per cent for the full year against 7.6-8 per cent estimated earlier.

The manufacturing sector posted a robust 9.3 per cent growth in the second quarter against 7.2 per cent in the previous three months, signaling improving efficiencies of companies rather than the actual improvement in output. Consumer goods was the only category to see improving business conditions in December as production and new orders rose. Conversely, incoming new work and output fell in both the intermediate and investment goods market groups, said the report based on a survey of 300 industrial companies. Economists dismissed the PMI data as being inconsistent with the actual economic activity.

“The extrapolation of the PMI readings to wider gauges of economic activity should be undertaken with caution, given the survey-based nature and the small sample. For instance, production of Coal India Limited has recorded a robust double-digit growth in both year-on-year and month-on-month terms in December 2015, in contrast to the gloomy trend revealed by the PMI,” said Aditi Nayar, senior economist at Icra.

Eighteen per cent of the panellists reported lower levels of new orders, which they commonly linked to heavy rains weighing on domestic demand, the report said. However, new business from abroad increased in December as weaker rupee led to improved pricing power in external markets.

The floods in December, too, affected supplier performance, which deteriorated to the worst extent since March 2013. On prices, the report highlighted rising inflationary pressures on account of rupee depreciation even as it remained below the long run average.

First Published: Tue, January 05 2016. 00:46 IST