Manufacturing activity grows at a slower clip in August; weakest in last nine months

With clear signs that weak global economic conditions continued to be a drag on export orders, manufacturing activity eased further to lowest level since November on the back of weak external demand and output disruptions caused by the major power failures in early August. Disrupting businesses and economic activity, sixteen states in northern India, home to almost half of the country's 1.2 billion people, fell into darkness last month as power grids collapsed.

According to the HSBC purchasing managers’ index (PMI), a headline index designed to measure the overall health of the manufacturing sector, expanded at the slowest pace in the nine months to 52.8 in August, 2012 tad lower from the reading of 52.9 recorded in July. However, the figure kept above 50 mark that signals increase in production, a number below 50 indicates contraction.

Underscoring the risks to the wider economy from euro zone's 2-1/2 year old sovereign debt crisis, the new export orders sub-index, an indicator of prospective overseas business, fell for second successive month in row to 49.2 from 49.7 in July, its deepest contraction since October. Meanwhile, the domestic orders helped increase output in August; the pace of expansion was the slowest since last November.

The sole bright spot among the survey's otherwise dull data was employment, which expanded at the fastest pace since data collection started 7 years ago. Meanwhile, payroll numbers at manufacturing companies in India increased for the sixth successive month amid reports of business growth. The inflation picture, on the other hand, was a bit mixed. While input price rose at a slower pace in six months, output price inflation picked up due to higher import costs and taxes.

Since manufacturing accounts for around 15 percent of India's gross domestic product, so a slowdown would not augur well for Asia's third-largest economy, which already languishing near its slowest pace of growth in a decade for Q1. Poor showing by the manufacturing sector pulled down the GDP growth to 5.5% in the first quarter, the decade's worst Q1 performance, against the growth figure of 8% in the corresponding period in the last fiscal. The survey, further underscored that with the slowdown partly supply driven and inflation risks still lingering, these numbers underscore that the room for policy rate cuts is very limited at the moment.