India’s manufacturing sector shows weakest expansion in 20 months

Due to stubbornly high inflation and Reserve Bank of India’s (RBI) continues rate hikes, the Indian manufacturing sector fell for the third month in row in July and reached to 20 month low level. As per the HSBC Markit Business Activity Index based on the survey of 500 companies declined to 53.6 in July, from 55.3 in June, this moderation is due to uncertainty in global demand weighed on orders and production growth. However, the HSBC Markit Business Activity Index remained above the 50 mark which separates growth from contraction for the 28th successive month.

The HSBC Markit Business Activity Index for the month of July showed the weakest growth since late 2009 and indicated the dampening of demand from key markets like US and Eurozone, which are suffering from their own respective debt crises.   

The growth of Indian economy is coming under pressure partly because of uncertainty in global economic condition, but mainly due to RBI’s nonstop hike in its key policy rates to check stubbornly high inflation. Last month RBI increased its short tern lending and borrowing rates by 50 basis points. However, government expects that this is not an end of policy tightening cycle, as headline inflation is still hovering near by the double digit figures.

The other indicators such as, Index of Industrial production (IIP) and eight core industries are showing signs of moderation in the Asia’s third largest economy. IIP growth for the month of May stood at 5.6% which is slowest in nine month and the Index of Eight core industries having a combined weight of 37.90% in the IIP, for the month of June stood at 5.2%. The Indian economy registered a five quarter slowest growth in the last quarter of 2010-11 it grew by 7.8%. 

The HSBC Markit Business Activity Index showed that the input prices increased sharply in July, on account of higher raw material cost, making manufacturing charging more for their product. The sub-index for the input and output prices remained at elevated levels.  On the other hand, it also indicated the first increase in Indian manufacturing sector employment for nine months. Labour shortages have restricted firms’ ability to fill vacant positions in recent survey periods. The increase in staffing levels suggested that the lack of suitable workers had alleviated to an extent, but the rate of job creation was modest, with the majority of respondents indicating no change in employment at their units since June.

By commenting on the India’s Manufacturing PMI survey Leif Eskesen, Chief Economist for India & ASEAN at HSBC said, “The momentum in the manufacturing sector eased further in July as sequential growth in output and new orders slowed, although employment picked up. In turn, backlogs of work grew less fast and supplier delivery times shortened”. On the inflation front, input costs and output prices accelerated. These numbers confirm that inflation pressures remain firmly in place despite the ongoing moderation in growth. The RBI will, therefore, have to maintain its tightening bias for a while still to anchor inflation expectations, Leif Eskesen added.