India’s manufacturing activity in July slumped to its lowest level since February 2009, dragged down by disruptions to business activity following the introduction of Goods and Services Tax (GST). The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) stood at 47.9 in July, down from 50.9 in June, and highlighted the first deterioration in business conditions in 2017 so far. July also marked the biggest month-on-month decline since November 2008, just after the collapse of Lehman Brothers triggered the global financial crisis. A figure above 50 denotes expansion while any reading below this level means contraction.
Following the GST launch, new orders and output dropped for the first time since the downturn in December last year post demonetisation. An output sub-index fell to 46.3, its lowest since early 2009, from 51.7 in June. This contraction is likely to put pressure on the Reserve Bank of India to lower interest rate at its policy meet. “Manufacturing growth in India came to a halt in July with the PMI down to its lowest mark in almost eight-and-a-half years amid widespread reports that the sector has been adversely affected by the implementation of the GST,” said Pollyanna De Lima, principal economist at IHS Markit and author of the report.
The GST launch, the survey said, affected demand. The reductions in output, new orders and purchasing activity were all the steepest since early 2009. “The weakening trend for demand, relatively muted cost inflationary pressures and discounted factory gate charges provide powerful tools for monetary policy easing, which has the potential to revive economic growth,” Lima said.
Discouraged by the downturn in factory orders, companies lowered production in July. The fall ended a six-month sequence of growth, and the rate of reduction was the most pronounced since the global financial crisis. Going forward, upcoming PMI releases will show whether underlying conditions remain on the downside or if July’s contraction was a temporary blip, Lima said.
The 12-month outlook for output remained positive in July, with companies expecting more clarity about GST to support growth. However, foreign demand for India-manufactured goods improved in July as new export orders continued to rise. That said, the rate of expansion softened from June’s eight-month high, the survey stated.
Although the monetary policy panel is under pressure from the government and investors to do more to spur economic growth, it is not expected to read too much into Tuesday’s PMI findings as the disruption from the rollout of GST is not expected to last for long. While some business segments have protested against the GST, many are struggling with the new compliance requirements that require them to file at least three returns every month. Some firms see the disruptions lasting until December, which could dent near-term growth.
“This is the lowest level of PMI since February 2009 and for the first time this year … it highlights the deterioration in business conditions in the country. Additionally, it also indicates that the introduction of the GST weighed heavily on manufacturing in July,” said Karthikraj Lakshmanan, senior fund manager, BNP Paribas Mutual Fund.
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