Rebound in India’s manufacturing sector PMI offers little comfort

Market


Business activity in India’s manufacturing sector continues to recover from the after-effects of the second wave of the coronavirus pandemic. But there are still some challenges that could upset this revival.

The latest IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) survey showed that the headline index stood at 53.7 in September, up from 52.3 in August. A bounce back in new orders and output sub-components of the PMI aided the up move in the headline index.

Furthermore, for Q2FY22, the PMI averaged at 53.8, an improvement over the 51.5 in the last quarter. A reading of above 50 indicates expansion and below the threshold points to contraction. However, economists warned of some other downsides that are likely to hinder a speedy economic recovery.

Inflation concerns

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Inflation concerns

“Looking ahead, we maintain that a return to the mid-to-high 50 headline readings that followed last year’s nationwide lockdown is unlikely, due to the additional damage caused by the delta outbreak to household and corporate balance sheets,” said Miguel Chanco, senior Asia economist, Pantheon Macroeconomics. He added that, tellingly, consumer confidence and new investment plans are yet to turn a corner, and the lagged impact of a recovery in global oil prices will start squeezing the broader economy, which remains very dependent on fuel imports .

Rising fuel, raw material and transportation prices pushed the overall rate of input cost inflation to a five-month high. Output prices, however, rose at a slower rate, the survey report showed.

Sharing a similar note of caution, Darren Aw, Asia economist at Capital Economics Ltd, said: “We think the recovery is now set to enter a slower phase. For a start, there are signs in other indicators that the initial boost to activity from looser containment measures is fading. In addition, global supply shortages could soon weigh on output.”

Aw added that there is evidence suggesting that parts of the manufacturing sector—most notably carmakers—have been cutting production due to supply constraints. Little wonder then that business confidence among manufacturers has not seen much improvement. Furthermore, for Q2FY22, the PMI averaged at 53.8, an improvement over the 51.5 in the last quarter. Also, despite the gradual improvement in the health of the Indian manufacturing sector, the employment scenario is dismal. The survey showed little change to manufacturing sector employment in September, as many firms reported the compliance of government guidelines surrounding shift work.

Of course, a bright spot in this gloom is that India’s pace of vaccination continues to pick up. However, given the huge population, economists said it would still take a few more quarters to inoculate the entire country, which could delay a full-fledged recovery.

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