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India’s Manufacturing Activity Improves At The Strongest Pace Since December

Activity in India’s manufacturing sector gathered momentum, improving at the fastest pace in the year so far, supported by the strength in output and new orders.

The Nikkei India Purchasing Managers Index improved to 53.1 in June from 51.2 in the previous month, according to a statement by 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 eleventh consecutive month.

“India’s manufacturing economy closed the quarter on a solid footing against a backdrop of robust demand conditions,” said Aashna Dodhia, economist at the research firm. Output growth was seen across all segments and key international markets also reported stronger demand, IHS Markit statement added.

Participants in the PMI survey cited strong underlying demand conditions as the reason for the pick up in manufacturing activity. New orders from the overseas markets also showed strong growth and accelerated at the fastest pace since February. Anecdotal evidence pointed to stronger demand from key international markets, said the IHS Markit statement.

Manufacturing firms also raised their staffing levels, with job creation at its strongest since the beginning of the year. “Jobs growth was evident across consumption, intermediate and investment goods,” the statement added.

Strengthening demand allowed businesses to pass on higher input costs.

Input cost inflation was the sharpest since July 2014, leading to output costs rising at the fastest pace since February. “Thus the central bank could remain under pressure to tighten monetary policy,” Dodhia noted.

Contrary to a pick up in activity, business sentiment fell to the weakest level since October.

The dip in optimism partly reflected concerns of a potential market slowdown in the year ahead. Indeed, some of the key challenges to the 12-month outlook include tighter domestic monetary policy and persistently high inflation.
Aashna Dodhia, Economist, IHS Markit

The PMI data is consistent with the expectation that growth will pick up in FY19 but will be accompanied by higher inflation. The RBI expects GDP growth to rise to 7.4 percent this year, with inflation expected to range between 4.5-5 percent.

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