India’s manufacturing sector expanded at the fastest pace in five months in March as output and new orders accelerated, according to a monthly survey that also showed price pressures eased. The Nikkei Markit India Manufacturing Purchasing Managers’ Index (PMI) — an indicator of manufacturing activity — increased to a five-month high of 52.5 in March, from 50.7 in February. A reading above 50 indicates expansion.
This is the third consecutive month of expansion after the demonetisation-induced contraction during November-December period. “PMI data for March reveal positive developments in the Indian manufacturing sector. Rates of expansion in factory orders and production accelerated again, encouraging some companies to scale up their input buying and take on additional workers,” said Pollyanna De Lima, Economist at IHS Markit and author of the report.
“This pick-up confirms that the adverse effects of the post-demonetisation credit crunch on demand and firms’ working capital had almost completely alleviated by March,” banking group Nomura said.
Input prices rose at a slower pace compared to February, and there was a corresponding slowdown in the pace of output price rises as well, which likely helped increase demand. The new orders index rose to a 5-month high of 53.6 from 51.3 the previous month. Export orders rose to 52.6 from 50.7.
The survey also showed that the inflationary pressure eased in the sector as input prices rose at a slower pace and the corresponding easing of output prices helped boost demand. The factory output grew fast as order books expanded at the quickest pace since the demonetisation move, which had hit the manufacturing as well as services sector hard in a largely cash-dependent economy.
On the prices front, the report said although both input costs and output charges rose further, inflation rates softened from February. During March, the rate of inflation slowed to the weakest in four months and was below the long-run survey average. “Given that input costs rose at a softer pace, a whopping 96 per cent of goods producers kept their selling prices unchanged over the month,” Lima said.
Going ahead, the survey painted a bullish outlook as business confidence among manufacturers improved in March, with almost one-fifth of panelists expecting output levels at their units to be higher in 12 months’ time.
Lima said production volumes are likely to rise further as businesses will seek to replenish their stocks. “Indeed, we saw a marked drop in inventories of finished items, alongside a stronger degree of confidence towards the year-ahead outlook for output,” she said.
The sustained recovery in orders saw firms ramp-up employment and production. The output sub-index jumped to 54.1 from 51.5 in February and the employment sub-index reached a four-year high. Despite higher orders, finished goods inventory was largely unchanged, resulting in the order-to-inventory ratio rising to a five-month high of 1.17 from 1.12 in February – a signal that output recovery should sustain in the coming months.
Inflationary pressures eased as the input and output price indexes moderated. The input price index fell to 54.1 from 57.5 in February, while the output price index fell to 51.0 from 53.4 as firms refrained from aggressively passing on past cost-push pressures, likely waiting for demand to fully recover after demonetisation. As a result, profit margins remain strained, with the ratio of the output-to-input price index still sub-1 at 0.94.
According to Nomura, overall, the data suggest that the disruption caused by note ban had largely eased by March. However, the manufacturing PMI in Q1 (51.2) was still lower than Q4 2016 (52.1). “In line with this, we expect GDP growth to slow to 6.7 per cent y-o-y in Q1 from 7 per cent in Q4, before rising to an average of 7.3 per cent in H2 2017 and 7.7 per cent in 2018, supported by lower lending rates, higher public spending and a consumption boost from state employee salary hikes. Overall, we interpret the manufacturing PMI data as suggesting an improving growth-inflation mix,” Nomura said.