PMI points to subdued manufacturing in Oct

The widely-tracked HSBC purchasing managers' index (PMI) for India’s manufacturing in October stayed around nine-month low of August and September. It inched up to 52.9 points in October from 52.8 in September. In August as well, PMI stood at 52.8 points, which was the lowest figure after 51 points in November, 2011.

Worse, the main commentator on PMI, Leif Eskesen said recovery in manufacturing will be slow going ahead and inflation will continue to stay elevated even as the rate of output price rise came down in October to the bottom since November, 2010. The forecast on manufacturing may dash hopes of policy makers that industrial growth will be high in the second half.

 

While new orders pushed up the index, outages blunted this effect.

The subdued level of manufacturing could be gauged from the fact that 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 stood near 55 points.

In October new orders increased for the 43rd consecutive month since April 2009.

New export orders saw a successive monthly expansion in the first month of the third quarter led by stronger international demand, the launch of new products and favorable 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 work”, said Leif Eskesen, chief economist at HSBC for ASEAN and India.

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

On the other hand, output prices increase at 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,” Eskesen said.

Recently, RBI refrained from cutting the key policy rate out of the fear of elevated inflation.

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

However, Eskesen's projections on manufacturing front may not be in line with what core sector data indicated. The eight core industries showed a recovery at 5.1% growth on the back of coal, cement and refinery products against just 2.3% in August. Core sector has 38% weight in the Index of Industrial Production (IIP), where manufacturing is dominates.

The contrasting indicators are emerging because PMI is month-on-month index, while official data calculates year-on-year growth.