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  3. May factory output shrinks for first time in over four years

May factory output shrinks for first time in over four years

03 Jun 2013 Evaluate

Shrinking for the first time in over four years, the seasonally adjusted HSBC Purchasing Managers’ Index, a composite indicator of operating conditions in the manufacturing economy slowed to 50.1 in May against its previous reading of 51.1 in April, registering its third monthly decline.

Production at Indian factories was the lowest since March 2009, mainly on account of softer domestic orders and persistent power shortages. Nevertheless, the PMI index, which gauges business activity in Indian factories but not its utilities, has held above the watershed 50 level that divides growth from contraction for over four years.

Further, although May data signaled rise in order book volumes for the fiftieth month, the overall rate of expansion was marginal and the slowest in that sequence. The factory production sub-index, showed output contracted in May from a month earlier as new orders growth slowed to a trickle. The output sub-index fell to 48.6 in May from 50.2 in April.

Although, input prices increased modestly during the month, but the rate of increase was the lowest in the current 50 months inflationary period. Meanwhile, output prices faced by manufacturers decreased for the first time in four years. Also, manufacturing companies signaled higher staffing levels during May, taking the current sequence of job creation to 15 months. One bright spot in the PMI survey showed orders from abroad came in at a faster pace than in April which might help the sector avoid a downturn this month.

Thus, the survey, which comes hard on the heels of data released on Friday that confirmed Asia’s third largest economy grew at its slowest pace in a decade in the fiscal year that ended in March, suggests with the output prices slowing and inflation receding, the RBI is likely to fire another salvo at its June policy meeting.  The Reserve Bank of India, so far, has slashed its key lending rate thrice this year by 25 basis points each time, lowering the rate to 7.25% to spur economic recovery.

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