A glove and a knife used in the processing of leather sit at the Jalandhar Leather (India) Pvt. tannery in Jalandhar, Punjab. (Photographer: Dhiraj Singh/Bloomberg)

India’s Manufacturing Activity Slows In May As Inflationary Pressures Pick Up

Activity in India’s manufacturing sector declined marginally in May on the back of weaker expansion in output, new order growth and employment. A build up of inflationary pressures, amid persistent crude oil rally led to the input and output cost rising at the fastest pace since February, thereby impacting activity growth.

The Nikkei India Purchasing Managers Index fell to 51.2 in May from 51.6 in the previous month, according to a statement by research firm IHS Markit, which compiles the index. A reading below 50 indicates contraction in activity, while a number above it signals expansion. Manufacturing activity in the country has remained above the 50-point-mark for the tenth consecutive month.

The survey indicated a further, though weaker improvement in India's manufacturing sector that took a major hit after twin shocks of demonetisation and rollout of goods and services tax. The gross domestic product data released by the Central Statistics Office yesterday revealed that manufacturing sector growth stood at 9.1 percent in the fourth quarter, as opposed to 8.5 percent in the third quarter.

In response to modest growth in new orders and output, firms raised their staffing levels in May, albeit at a softer pace. Business sentiment remains upbeat, even as purchasing activity declined for the first time in seven months, last month, according to the IHS Markit statement. Greater production in consumption-centric businesses continue to outweigh the decline in private investment.

A build-up of inflationary pressures re-emerged with input cost and output charge inflation at the strongest since February, due to the upswing in global oil prices. As a net importer of crude oil, this could potentially destabilise India’s recovery, particularly in private consumption.
Ashna Dodhia, Economist, IHS Markit

Going ahead, IHS Markit anticipates further depreciation in the rupee and a wider current account deficit due to high oil prices. The Brent Crude has rallied 15.8 percent so far this year, resulting in a 5.5 percent depreciation in the rupee against the U.S. Dollar.