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  3. Factory activity shrinks in August for first time in over four years

Factory activity shrinks in August for first time in over four years

02 Sep 2013 Evaluate

Adding to the country’s deepening economic glum, the Indian manufacturing activity shrank for the first time in more than four years in August. The HSBC Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, which gauges business activity in Indian factories but not its utilities, fell from 50.1 to 48.5 in August. The index had been running close to the 50 mark that separates growth from contraction since May, 2013, however this time around it breached the 50 mark, a reading which was the lowest since May 2009.

Decline in new orders, especially export orders, led to the contraction of Indian manufacturing activity during August. In a sign that domestic demand is also faltering, new orders, which include domestic orders, shrank at a faster pace. The index fell for the sixth straight month to 47.5 in August, its lowest since February 2009.  Meanwhile, new export orders shrank for the first time in a year. Consequently, Indian manufacturers reduced their production volumes for the fourth consecutive month in August and at the fastest rate in four-and-a-half years.

Encouragingly, August data highlighted a further expansion of employment levels in the Indian manufacturing sector. However, the rate of job creation remained slight. Additionally, input and output price inflation slowed despite the weakening of the currency, which likely reflects the softening demand conditions and, therefore, declining pricing power.

The bleak Purchasing Managers' Index (PMI) comes close on the heels of data on Friday that showed Asia's third-largest economy growing at its lowest quarterly rate in the three months to June since the global financial crisis, suggesting more pain ahead. 

Further, reports suggested RBI of likely keeping its liquidity tightening measures in place for a while to help contain the depreciation of the currency, besides warning that the heightened macroeconomic uncertainty will continue weighing on growth in coming months.

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