October factory output subdued

The widely-tracked HSBC Purchasing Managers’ Index (PMI) for India’s manufacturing sector stayed around the same nine-month-low level in October as in August and September.

It inched up to 52.9 points in October from 52.8 in both September and August, the lowest figure since 51 points in November 2011.

Leif Eskesen, chief econnomist at HSBC for Indian and Asean, said it was clear the recovery in manufacturing would be slow and inflation would continue to stay elevated, even as the rate of output price rise came down in October to the least since November 2010.

If this forecast comes true, it would dash the hopes of policy makers that industrial growth will be high in the second half.

 

While new orders pushed up the index, power outages blunted this effect. The subdued level of manufacturing can be seen from the fact that the PMI had stood as high as 55 points in June, 56.6 in February and 57.5 points in January. In March, April and May, it was near 55.

However, new orders in October increased for the 43rd month in succession since April 2009. New export orders saw successive monthly expansion in the first month of the third quarter, led by stronger international demand, the launch of new products and favourable exchange rate conditions.

"Economic activity in the manufacturing sector picked up slightly, thanks to firm new orders. However, insufficient power dampened output growth and led to an increase in outstanding (pending) work,” said Eskesen.

Due to power cuts, post-production inventories were used to meet demand requirements. Even in the otherwise robust core sector data, electricity grew just 3.7 per cent in September, according to official data.

On the other hand, output prices increased at the slowest rate in 23 months. Input price inflation in the Indian goods-producing sector persisted in October but was the slowest in 25 months. Part of the burden of input cost inflation was passed on to clients, as output prices were increased again.

“Looking ahead, the recovery in manufacturing growth is likely to be slow and inflation is likely to stay elevated for a while still,” said Eskesen.

The Reserve Bank has just decided to refrain from cutting the key policy rate, from fear of elevated inflation.

The PMI survey showed manufacturing firms signalled higher purchasing activity in October, amid reports of greater production and staffing levels, leading to an eight-month sequence in job creation.

However, Eskesen's projections on manufacturing front might not be in line with what core sector data indicate. The eight core industries showed a recovery at 5.1 per cent growth on the back of coal, cement and refinery products against just 2.3 per cent in August.

The core sector has 38 per cent weight in the Index of Industrial Production, where manufacturing dominates. The contrasting indicators are emerging because PMI is a month-on-month index, while official data calculates year-on-year growth.