Manufacturing activity in May remained dull even as their growth inched up, compared to April, showed the widely-tracked Nikkei Purchasing Managers’ Index (PMI).
The PMI for manufacturing rose to 50.7 points, from the 50.50 in April. The index had shown an eight-month high of 52.4 in March.
The seasonally adjusted index is a composite single figure indicator of manufacturing performance. A reading above 50 represents expansion, while one below this level means contraction. However, April still represented a fourth consecutive month of output growth mainly due to improvements in new export business remaining sustained, although growth was at a six-month low. Manufacturing had last contracted in December at 49.1.
"Signs of challenging economic conditions in the Indian manufacturing sector were evident in May, with output losing further growth momentum. The headline PMI remained in expansion territory, but recorded one of its lowest readings since the end of 2013, suggesting that the sector is barely improving," Pollyanna De Lima, Economist at Markit and author of the report, said.
While new orders expanded in May at a "slight pace" and was mostly driven by the domestic market, new business from abroad fell for first time since September 2013. Similarly, goods producers continued to raised their output volumes but to the least extent. Whereas higher production was associated with an increase in order books, there were mentions that growth was hampered by the assembly elections in certain regions, the report said.
PMI data indicated that Indian manufacturers had sufficient resources to work on existing projects, as outstanding business declined in May. Contributing to the overall decline in backlogs was an expansion in workforce sizes. The rate of job creation was, however, only marginal yet again, a trend that has been evident for almost two years.
On the price front, input cost inflation accelerated to a 14 month high, its fastest since March 2015. Last month panel members had blamed high costs of a range of raw materials such as metals, chemicals, plastics, paper and food as the cause. Interestingly, in spite of the high cost burden, manufacturers increased selling prices at the slowest rate in the last 3 months, the report noted, suggesting a strongly competitive environment.
The report showed that intermediate goods producers fared better than their counterparts producing consumer, intermediate and investment goods. The last category saw a further decline in both output and new orders.
Earlier in April, the RBI cut its policy rate by 0.25% to 6.5%. While this was the first rate cut after a gap of six months, the RBI has lowered its rate by 1.5% cumulatively since January 2015.
"So far, there is little evidence that the latest cut in the benchmark rate acted to significantly improve business conditions for manufacturers. Therefore, further stimulus may be necessary to shift the economy into a higher gear," Lima said.
Domestic industry has also demanded further rate cuts from the apex bank to boost investment. Meanwhile, the Indian economy grew at 7.9% in the fourth quarter of 2015-16 taking the overall GDP growth to a five-year high of 7.6% in the fiscal year.
The PMI figures for China, which were released earlier in the day, showed that growth in manufacturing activity in the country stayed same as April, at 50.1. This has raised more doubts about the recent recovery in the world's second-largest economy grappling with a slowdown.
While analysts suggested the sector was stabilizing on the back of higher commodity prices, a better housing market and plenty of government spending questions remain as to whether the slow upturn will last.